Fiscal Performance in the Wake of Fiscal Responsibility Legislation:A Study of Maharashtra’s Public Finances

Fiscal responsibility legislation (FRL) has been seen as an important measure to control the fiscal profligacy of governments. While initially FRLs were enacted at the level of federal or central governments, it was soon realised, that for sustaining the health of government finances, such legislations were required for subnational governments as well. India has been no exception to this. This paper focuses attention on the impact of FRL in the state of Maharashtra which was enacted in 2004-05 in the wake of worsening public finances. While the finances of the government of Maharashtra have improved after 2004-05, we explore the factors that have led to this improvement. We do this by carrying out a time consistency check by performing rolling computations comparing the fiscal performance in the pre- and post-FRL time periods. An econometric exercise, using GMM estimation, is also employed for this purpose. We find that much of the improvement in the public finances of the state has been driven by transfers from the central government rather than through the effort of the state itself.