Sigma and Beta Convergence in Revenues and Expenditure across Indian States

Abstract

Applying the idea of convergence in economics to revenues and expenditures of state governments (sub-national governments), the paper examines fiscal convergence across states in India. Using panel and cross-section regressions, the study finds evidence of convergence in revenues and expenditures. Among the fiscal indicators used in the paper, the speed of beta convergence was found to be highest in capital outlay. We contribute to the existing literature by examining the process of fiscal convergence for pre and post fiscal rules period. The comparison of convergence process before and after implementation of fiscal rules revealed that, the convergence was more pronounced in the post-FRBM period. Evidence of the favourable impact of fiscal rules on indicators such as capital outlay suggest that states should follow fiscal rules for fiscal consolidation without compromising on the quality of expenditure.