Containing Fiscal Deficit

This is in response to the article “Persistent Fiscal Deficits and Political Economy Transitions in India: An Empirical Investigation” by Amarendu Nandy, Abhishek Sur and Santanu Kundu (EPW, 22 February 2020). The objective of the article, as mentioned in it, is “to analyse the macroeconomic and political economy factors affecting India’s fiscal deficit between 1978–79 and 2016–17” (pp 34–35). The chosen variables and the econometric methods adopted are appropriate for exploring the trajectory of fiscal deficit. The authors claim that the political economy approach is missing in the existing literature, for which an attempt has been made to fill this epistemic gap. The authors have considered the strength of the government (in terms of the number of seats of the single largest party in Parliament), the election year, and the nature of political opposition as explanatory variables in exploring the relationship between these variables and the fiscal deficit outcome. The article mentions that “in the long run, besides economic variables, political economy factors have also significantly contributed to the persistence of the fiscal deficit in India.”

A detailed and nuanced reading of the article highlights certain missing links in terms of the selection of the variables, subsequent analysis and, most importantly, the mismatch between the policy recommendations suggested by the authors and the findings. Let us deal with them one by one. In order to assess the pattern of fiscal deficit, it is imperative to take note of the entire economic governance framework or regime within which the fiscal discipline has been dealt with; to illustrate, it was found that “the absence of a long-term road map for fiscal consolidation is quite evident.” This is a revealing aspect; however, this has to do with the whole array of institutions that govern the economic growth of the nation.