Fiscal Performance Benchmarking Of Indian States-A Robust Frontier Approach

Aim: The objective of the paper is to construct an index of fiscal performance of Indian states using four non-parametric approaches ( Data Envelopment Analysis(DEA), Free Disposal Hull(FDH), Order-m and Order-alpha).The reason behind using non-parametric methods for the purpose of construction of index is that the traditional ratio approach is incapable of handling multiple input and output indicators.Research methods: The present study uses a two stage approach. In the first stage, four non-parametric methods have been used to evaluate the performance of Indian states for five consecutive years. The input and output indicators have been selected on the basis of a simple theoretical model. Further, in order to tackle the problem of estimation bias (due to sampling variations) bootstrapped DEA and bootstrapped Order-m methods have been applied. In the second stage ,impact of indebtedness on the performance of the states has been assessed using a censored regression framework.Findings: The major outcome of the study is the construction of a fiscal performance index based on multiple indicators. Moreover, the second stage results indicate that state performance is significantly influenced by their degree of indebtedness.Originality/Value of the article: The present study is perhaps the first attempt to assess the performance of sub-national units in terms of both convex and non-convex mathematical programming methods.Implications of the research : The approach (with suitable modifications) can be effectively used to benchmark state performance which can serve as a basis for resource transfer from the central government to the states.