## _wp09175

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### I. Introduction — context and objectives
- India adopted the Fiscal Responsibility and Budget Management Act (FRBMA) in August 2003 after a decade of large and intractable fiscal deficits.
- FRBMA’s stated objective: ensure inter-generational equity in fiscal management and fiscal sustainability necessary for long-term macro-economic stability.
- Twelfth Finance Commission (TFC) incentives encouraged states to implement state FRLs via conditional debt restructuring and interest rate relief.
- With FRBMA and FRLs originally setting targets until March 2009, the Thirteenth Finance Commission is reviewing the fiscal rules framework.
- Paper’s aim:
  - analyze fiscal performance at central and subnational levels since FRBMA and state FRLs;
  - assess strengths and weaknesses of the current fiscal rules framework and complementary reforms;
  - propose reform options, including a simple fiscal rule anchored on a medium-term debt target with annual nominal expenditure growth rules.

### II. India’s fiscal deterioration in the 1990s — drivers and magnitude
- Drivers:
  - reform-induced revenue losses from reductions in customs and excise duty rates;
  - narrow tax base and low tax buoyancy;
  - inability to contain current public spending;
  - civil service wage increases from the Fifth Pay Commission.
- Consequences:
  - persistent primary deficits and sharp accumulation of debt.
  - In 2003/04 general government deficit at 9 percent of GDP and debt more than 87 percent of GDP.
- Consolidation objective: create fiscal space for counter-cyclical policy and crisis-related spending, highlighted by the 2008/09 global financial crisis.

### III. FRBMA design: procedural and numerical features
- Coverage and procedural rules:
  - FRBMA covers only the central government.
  - Requires multiyear monitorable fiscal policy strategy, yearly statements to parliament on medium-term fiscal policy and macro framework with rolling targets, routine reporting and publication of outcomes; Minister of Finance must explain substantial deviations (no explicit timeframe for correction or sanction).
  - Prohibition on government borrowing from the Reserve Bank of India starting April 2006.
- Numerical rules (as stated in the Act and associated rules):
  - single medium-term zero-current-balance target for the central government to be achieved by March 2008 (deadline later postponed).
  - numerical paths: reduction of current deficit by at least 0.5 per cent of GDP each financial year beginning 2004/05; reduction of fiscal deficit by at least 0.3 percent of GDP each financial year so fiscal deficit ≤ 3 percent of GDP at end-March 2008; limit of 0.5 percent of GDP on incremental guarantees; initial annual limit on debt accumulation of 9 percent of GDP, to be reduced by at least one percentage point of GDP each year.
  - Precise accounting definitions for target indicators not provided.
  - Original deadline postponed to March 2009 (2005/06) and again to March 2010 (2008/09 Budget).
  - Breaches allowed for national security, national calamity, or other exceptional grounds specified by Central government.

### IV. Central government performance under FRBMA (2003/04–2007/08 and 2008/09)
- Headline improvements (2003/04 → 2007/08 provisional):
  - central government fiscal deficit: 5.1 → 2.8 percent of GDP (achieved 3-percent medium-term target one year in advance).
  - 2007/08 current deficit: 1.2 percent of GDP (one-third of 2003/04 level).
  - more than two-thirds of adjustment due to revenue gains; remainder mostly from declining interest payments.
  - outstanding liabilities declined by 4.4 percent of GDP.
- Caveats / augmented indicators:
  - increased use of subsidy-related bonds excluded from authorities’ current spending and deficit definitions.
  - inclusion of quasi-fiscal expenditures reduces apparent adjustment.
  - almost no correction on expenditure side; adjustment driven by enhanced revenue.
  - even including off-budget subsidy-related expenditure, India roughly on track to meet postponed FRBMA targets until 2007/08.
- Selected Table 1 figures (In Percent of GDP; preserving reported values):
  - Total revenue and grants: 2003/04 = 10.2; 2004/05 = 10.2; 2005/06 = 10.1; 2006/07 = 10.9; 2007/08 = 11.8; Cumulative change 2003/04-2007/08 = 1.6; 2008/09 Prov. = 11.0
  - Net tax revenue: 2003/04 = 6.8; 2004/05 = 7.2; 2005/06 = 7.6; 2006/07 = 8.5; 2007/08 = 9.3; Cumulative change = 2.5; 2008/09 Prov. = 8.9
  - Nontax revenue: 2003/04 = 3.3; 2004/05 = 2.9; 2005/06 = 2.4; 2006/07 = 2.3; 2007/08 = 2.4; Cumulative change = -0.9; 2008/09 Prov. = 2.0
  - Total expenditure and net lending: 2003/04 = 15.3; 2004/05 = 14.3; 2005/06 = 14.3; 2006/07 = 14.3; 2007/08 = 14.5; Cumulative change = -0.8; 2008/09 Prov. = 16.8
  - Current expenditure 1/: 2003/04 = 13.8; 2004/05 = 12.7; 2005/06 = 12.7; 2006/07 = 12.8; 2007/08 = 13.0; Cumulative change = -0.8; 2008/09 Prov. = 14.9
  - Capital expenditure and net lending 2/: 2003/04 = 1.5; 2004/05 = 1.6; 2005/06 = 1.6; 2006/07 = 1.5; 2007/08 = 1.6; Cumulative change = 0.0; 2008/09 Prov. = 1.9
  - Overall balance: 2003/04 = -5.1; 2004/05 = -4.1; 2005/06 = -4.1; 2006/07 = -3.4; 2007/08 = -2.8; Cumulative change = 2.3; 2008/09 Prov. = -5.8
  - Overall balance (augmented) 3/: 2003/04 = -5.2; 2004/05 = -4.1; 2005/06 = -4.6; 2006/07 = -4.4; 2007/08 = -3.4; Cumulative change = 1.9; 2008/09 Prov. = -7.1
  - Current balance: 2003/04 = -3.6; 2004/05 = -2.5; 2005/06 = -2.6; 2006/07 = -1.9; 2007/08 = -1.2; Cumulative change = 2.4; 2008/09 Prov. = -4.0
  - Current balance (augmented) 3/: 2003/04 = -3.7; 2004/05 = -2.5; 2005/06 = -3.1; 2006/07 = -2.5; 2007/08 = -1.8; Cumulative change = 1.9; 2008/09 Prov. = -4.2
  - Subsidy-related bonds 4/: 2003/04 = 0.1; 2004/05 = 0.0; 2005/06 = 0.5; 2006/07 = 1.0; 2007/08 = 0.6; Cumulative change = 0.5; 2008/09 Prov. = 1.3
  - Central Government Debt 5/: 2003/04 = 68.4; 2004/05 = 67.9; 2005/06 = 66.1; 2006/07 = 64.2; 2007/08 = 64.1; Cumulative change = -4.4
- 2008/09 deterioration:
  - Central government deficit set to reach a historical high in 2008/09, eliminating fiscal improvement since FRBMA introduction.
  - Fiscal measures since October 2008 estimated at 0.6 percent of GDP and deceleration in tax revenue due to slowdown contributed.
  - Pre-crisis budget choices (agricultural debt write-off, NREGS expansion, income tax bracket revision) and Sixth Pay Commission award (20 percent salary hike) undermined credibility.
  - Subsidy bill increased dramatically with global commodity price run-up in first half of 2008.

### V. States: rules, adoption patterns, and performance up to mid-2008
- States account for roughly half of the general government fiscal deficit; consolidation success depends critically on subnational performance.
- Adoption:
  - As of mid-2008, twenty-six of India’s 28 states enacted FRLs; West Bengal and Sikkim had not.
  - Common FRL features: targets to eliminate current deficit by 2008/09 and reduce overall deficit to 3 percent of GSDP by 2009/10 (TFC suggestion), annual reduction targets, transparency measures, medium-term frameworks; some states set explicit liability targets and expenditure management rules.
  - Early adopters tended to have higher Human Development Indicators and better infrastructure.
  - States with higher transfer dependence were slower to adopt FRLs.
- Aggregate state performance (Table 2 and text):
  - consolidated states’ deficit: 4.5 → 2.5 percent of GDP (2003/04 → 2007/08).
  - Aggregate states’ fiscal deficit declined by 2 percent of GDP between reported periods, driven largely by revenue increases.
  - More than three-quarters of the 2 percent of GDP decline due to increase in state revenue.
  - Gain in own tax revenue: 0.4 percent of GDP (VAT implementation and improved administration).
  - Non-tax revenue: cumulative change -0.1 percent of GDP.
  - Reduction in current expenditure: 0.6 percent of GDP, entirely from declining interest payments; interest payments decline: -0.7 percent of GDP.
  - State government debt: decline of 4.8 percent of GDP (33.2 → 28.4; cumulative change -4.8).
  - Net resources transferred from central government increased cumulatively by 1.0 percent of GDP.
  - Overall balance (percent of GDP): 2003/04 = -4.5; 2004/05 = -3.5; 2005/06 = -2.5; 2006/07 = -1.9; 2007/08 = -2.5; Cumulative change = 2.0; 2008/09 B.E. = -2.4
  - Revenue balance: 2003/04 = -2.2; 2004/05 = -1.2; 2005/06 = -0.2; 2006/07 = 0.6; 2007/08 = 0.5; Cumulative change = 2.7; 2008/09 B.E. = 0.5
  - Cumulative finding: overall deficit excluding central transfers and interest payments shows modest decline of 0.3 percent of GDP.
- Heterogeneity and role of central transfers:
  - substantial variation across states in decomposition of deficit correction (own revenue, central transfers, current expenditure decreases).
  - fiscal correction aggregate pattern revenue-led with large role for central transfers.
  - only 4 of 17 major states reduced non-interest current expenditure as share of GSDP.
  - projected slowdown in 2008/09 and 2009/10 likely to setback consolidation.

### VI. Empirical evidence on state FRLs and design features
- Methodology highlights:
  - time-varying post-FRL indicator (ever-enacted FRL × post-enactment period);
  - dependent variable: current deficit as share of GSDP, refined by excluding central transfers and interest payments to capture states’ own effort;
  - controls: year and state fixed-effects, log(state GSDP), lagged debt-GSDP, VAT indicator; some specifications use Arellano-Bond with lagged dependent variables.
- Main findings:
  - conventional current deficit measure significantly declines post-FRL adoption (Table 3 columns (1)-(3));
  - when excluding central transfers and interest payments, post-FRL coefficient becomes statistically insignificant and much smaller (Table 3 columns (4)-(9));
  - implication: state FRLs correlate with aggregate improvement but not with statistically significant greater own-resource effort once transfers and interest are excluded.
- Heterogeneity by FRL design (Table 4):
  - inclusion of explicit debt targets and expenditure targets in FRLs correlated with stronger consolidation (interaction coefficients negative and in some specs statistically significant: e.g., Post * FRL * Debt Target = -0.0083**, -0.0076*; Post * FRL * Expenditure Target = -0.0158**, -0.0063**, -0.0059**).
  - compliance frequency not associated with differential performance.
  - caution: endogeneity of adoption and design limits causal interpretation; results are correlations guiding effective design features.

### VII. Control over state financing and associated risks
- Financing composition (Table 6, percent of total financing; selected reported sequences preserved):
  - Market borrowings (net, Article 293 permission): 27.9, 38.4, 31.1, 17.0, 16.5, 54.6, 50.0
  - Loans from center (net, controlled): -2.0, -27.6, -29.8, -4.0, 2.4, 3.3, 1.2
  - Securities issued to NSSF (uncontrolled): 51.2, 54.6, 80.0, 81.9, 70.5, 8.2, 17.3
  - Other (uncontrolled): 23.0, 34.6, 18.7, 5.0, 10.5, 33.9, 31.5
- Significant share of state financing from “uncontrolled” sources (e.g., NSSF securities, other instruments) weakens central macro control and creates hidden fiscal risks.
- Some borrowing forms (small savings, public accounts deposits, guarantees for SPVs) provided as much as 40-50 percent of total financing in recent years.

### VIII. Assessment of FRBMA: strengths and weaknesses
- Strengths:
  - procedural emphasis: medium-term fiscal framework and enhanced transparency requirements; alignment with advanced-country frameworks.
- Weaknesses:
  - absence of precise accounting definitions for fiscal indicators enabling creative accounting (e.g., special bonds).
  - insufficient transparency and medium-term expenditure planning; lack of annual forecasts for key macro variables; weak disclosure of fiscal risks (contingent liabilities, PPPs).
  - focus on deficit-type targets (current balance) can promote procyclicality and misclassification incentives.
  - lack of explicit debt target and expenditure rules; general government debt fell only by 7-8 percent of GDP; general government debt at 80 percent of GDP as of March 2008.
  - no well-defined sanctions for noncompliance; enforcement relies on reputational loss.
  - widely defined escape clauses allow frequent suspension or postponement of targets.
  - no independent assessment of compliance; historical forecast errors show revenues and expenditures often mispredicted (Table 5 Outturn/Budget ratios).
- Table 5 budget implementation highlights (percent of GDP; reported values preserved):
  - Revenue: Budget 9.9, 10.5, 10.6, 10.5, 11.7; Outturn 10.2, 10.2, 10.1, 10.9, 12.5; Outturn/Budget 104, 98, 98, 101, 107
  - Expenditure: Budget 16.0, 15.0, 14.9, 14.2, 15.0; Outturn 15.4, 14.3, 14.7, 15.3, 15.9; Outturn/Budget 97, 95, 99, 108, 106
  - Fiscal balance (Budget): -6.1, -4.6, -4.3, -3.7, -3.3; Outturn: -5.2, -4.1, -4.6, -4.4, -3.4; Outturn/Budget 86, 92, 109, 123, 105
  - Note: Table 5 includes off-budget bond issuance in expenditure figures.

### IX. International best-practice features summarized
- Design and implementation features enhancing rule effectiveness:
  - clarity of definition, institutional coverage, escape clauses;
  - transparency of accounting and forecasts;
  - simplicity for communication and enforcement;
  - flexibility to accommodate exogenous shocks (cyclically adjusted balances or narrow escape clauses);
  - internal consistency with debt and expenditure linkages;
  - enforceability with legal basis and sanctions beyond reputation;
  - independent monitoring (fiscal councils);
  - adequate supporting policy measures (pension, subsidy reform);
  - strong Public Financial Management and medium-term fiscal frameworks.

### X. Policy implications and recommended directions
- Aggregate state consolidation masks modest own-state effort; central transfers drove much improvement.
- Projected slowdown in 2008/09 and 2009/10 likely to undermine consolidation at both center and states.
- Design features to enhance FRL effectiveness:
  - incorporate explicit debt targets and expenditure rules in state FRLs (empirical correlation with stronger consolidation);
  - improve accounting definitions and close loopholes (bring subsidy-related expenditures above the line);
  - enhance budget transparency: explicit forecasts for key macro variables and disclosure of fiscal risks and contingent liabilities (including PPPs);
  - introduce independent assessment mechanisms (fiscal council-like) for ex ante and ex post compliance evaluation and unbiased forecasts;
  - complement deficit targets with debt or expenditure rules to reduce procyclicality and misclassification incentives;
  - strengthen enforceability through clearer sanctions or corrective mechanisms;
  - reform intergovernmental fiscal relations to reduce uncontrolled financing channels and hidden borrowing; revisit transfer and borrowing regimes to improve subnational discipline.
- Recommended sequencing: reestablish fiscal discipline at the center as macroeconomic conditions permit, given central role in promoting fiscal prudence.

### XI. Institutional and accounting reforms to reduce creative accounting and biased forecasts
- Independent accounting standards and scorekeeping:
  - adopt international standard budget classification (GFSM (2001)) and reform chart of accounts for consistency;
  - empower an independent scorekeeper (expand Controller Accountant General and Controller Auditor General) to assess compliance and prepare objective timely reports (modeled on EUROSTAT).
- Expand fiscal coverage and transparency:
  - bring all subsidy-related expenditures above the line; gradually include public enterprises and SPVs (PPPs) in fiscal accounts;
  - new FRBMA numerical targets should be supported by concrete short- and medium-term plans and annual forecasts for GDP growth, inflation, imports, exports, exchange rate;
  - budget documents should discuss fiscal risks and potential responses (e.g., statement of fiscal risks as done in Indonesia).

### XII. Medium-term focus: debt and expenditure-growth rule proposal
- Core proposal:
  - set a medium-term debt target and reduction path;
  - complement debt target with annual nominal expenditure growth rules computed from government budget constraint given projected revenue and trend GDP growth;
  - include a debt-feedback mechanism allowing revisions to expenditure ceilings when actual debt deviates from path by a preset threshold.
- Illustrative anchor (preserving reported values and assumptions):
  - lower India’s general government debt from 82 percent of GDP as of end 2009/10 to 65 percent of GDP by 2015/16, assuming implementation begins in 2010/11; debt norm is back loaded.
  - assumptions: trend potential GDP growth of 8 percent (annual growth averaging roughly 7.7 percent); real interest rate at 4 percent; constant elasticity of total general government receipts w.r.t. nominal GDP = 1.03.
  - implied nominal annual non-interest expenditure growth rate: 9.8 percent would bring debt-to-GDP to 65 percent by 2015/16.
- Adjustment rules:
  - constant maximum nominal expenditure growth ceiling calculated and binding;
  - adjustments allowed only when actual public debt deviates by more than 4.5 percentage points of GDP from desired path;
  - triggered revision resets expenditure growth rule so medium-term target achieved over remaining period.
- Comparative analysis with a constant deficit rule:
  - a general government deficit of 4.9 percent of GDP consistent with achieving the debt target given assumed trend GDP growth.
  - three scenarios compared: (i) mild business cycle around trend GDP growth of 7.7 percent; (ii) amplified business cycle around trend; (iii) slow recovery (negative output gap remains) using IMF staff growth projections.
  - indicators used: root mean squared deviation from debt norm; mean deviation from norm; deviation from medium-term debt target in final year (2015/16).
  - procyclicality assessed by plotting change in primary balance (fiscal impulse) against deviations of real growth from trend.

### XIII. Appendix: simulated comparisons of rules and scenarios (2009/10–2015/16)
- Key qualitative simulation findings:
  - expenditure rules are less procyclical than a constant GG deficit rule, particularly under negative output shocks (case 3).
  - constant deficit rule implies sharp consolidation in 2010/11 with large negative fiscal impulse when growth below trend or at trend.
  - under constant deficit rule, fiscal policy loosens when above-trend growth would force extra savings under expenditure rules (2012/13–2014/15).
  - debt-feedback mechanism can trigger stronger consolidation late in horizon if actual debt exceeds debt norm by > 4½ percentage points of GDP (example: trigger in 2014/15).
  - expenditure rule often closer to debt norm by root mean square deviation and mean error, though sensitivity to debt norm choice noted.
- Appendix Table 1 (preserving reported strings and ordering):
  - Constant GG deficit 
  - Debt Target + Nominal Growth of Spending Rules
  - Root mean square deviation with respect to the norm path 1/3.111.58
  - Mean error with respect to the norm path 1/-2.801.26
  - Difference from 65 percent in 2015/160.02-0.06
  - Root mean square deviation with respect to the norm path 1/3.132.42
  - Mean error with respect to the norm path 1/-2.781.53
  - Difference from 65 percent in 2015/160.04-0.15
  - Root mean square deviation with respect to the norm path 1/2.673.05
  - Mean error with respect to the norm path 1/-2.362.65
  - Difference from 65 percent in 2015/16-0.150.00
  - 1/ In percent of GDP.
  - Staff Growth Projections / Negative Output Shock
  - Amplified Cycle
  - Business Cycle
- Figure panel series and legend labels preserved as reported (public debt, output gap, fiscal impulse series and scenario labels), illustrating the comparative dynamics across Business Cycle, Amplified Cycle, and IMF Staff Projections.

*Source: Excerpt from _wp09175 (IMF staff paper PDF content provided).*

### References..............................................................................................................

### _wp09175 - References..............................................................................................................

### I. Introduction — context and objectives
- India adopted the Fiscal Responsibility and Budget Management Act (FRBMA) in August 2003 after a decade of large and intractable fiscal deficits.
- FRBMA’s stated objective: ensure inter-generational equity in fiscal management and fiscal sustainability necessary for long-term macro-economic stability.
- India’s states were given incentives by the Twelfth Finance Commission (TFC) to implement their own fiscal responsibility laws (FRLs) in the form of conditional debt restructuring and interest rate relief.
- With the FRBMA and FRLs only setting out targets until March 2009, the Thirteenth Finance Commission is reviewing India’s fiscal rules framework.
- Paper’s aim: contribute to policy debate on a successor arrangement for the FRBMA by (i) analyzing fiscal performance at central and subnational levels since FRBMA and state FRLs; (ii) assessing strengths and weaknesses of the current fiscal rules framework and complementary reforms; (iii) proposing reform options including a simple fiscal rule anchored on a medium-term debt target with annual nominal expenditure growth rules.

### II. India’s fiscal deterioration in the 1990s — drivers and magnitude
- Drivers of deterioration included: reform-induced losses in revenue from reductions in customs and excise duty rates; poor tax performance due to a narrow tax base and low tax buoyancy; inability to contain current public spending; implementation of civil service wage increases recommended by the Fifth Pay Commission.
- Consequence: persistent primary deficits and sharp accumulation of debt.
- In 2003/04 India had one of the largest general government deficits in the world at 9 percent of GDP and debt reached more than 87 percent of GDP.
- Fiscal consolidation objectives included creating fiscal space for counter-cyclical fiscal policy and crisis-related spending, highlighted by the 2008/09 global financial crisis.

### III. FRBMA design: procedural and numerical features
- Coverage: FRBMA covers only the central government.
- Procedural rules require:
  - Commitment up-front to a monitorable fiscal policy strategy over a multiyear period.
  - Submission to parliament of yearly statements on medium-term fiscal policy, the fiscal policy strategy, and a macroeconomic framework with rolling targets.
  - Routine reporting and publication of fiscal outcomes and strategy changes; Ministry of Finance prepares quarterly reports sent to parliament.
  - Minister of Finance must present explanations and remedial measures if substantial deviations occur, but no timeframe for correction and no explicit sanction for failure to meet targets.
- Prohibition: borrowing by the government from the Reserve Bank of India starting April 2006.
- Numerical rules set out in the Act and associated rules:
  - A single, medium-term, zero-current-balance target for the central government to be achieved by March 2008 (deadline later postponed).
  - Numerical rules: (i) reduction of current deficit by at least 0.5 per cent of GDP in each financial year beginning with 2004/05; (ii) reduction of the fiscal deficit by at least 0.3 percent of GDP in each financial year so that the fiscal deficit is brought down to not more than 3 per cent of GDP at the end of March 2008; (iii) limit of 0.5 percent of GDP on the incremental amount of guarantees given by the central government; (iv) initial annual limit on debt accumulation of 9 percent of GDP, to be progressively reduced by at least one percentage point of GDP each year.
  - Precise accounting definitions of the relevant target indicators are not provided in the legislation.
  - Original deadline postponed to March 2009 (in 2005/06) and then again to March 2010 in the 2008/09 Budget.
  - Breaches allowed on grounds of national security or national calamity or such other exceptional grounds as the Central government may specify.

### IV. Central government performance under FRBMA (2003/04–2007/08 and 2008/09)
- Headline improvements (2003/04 to 2007/08 provisional):
  - Central government fiscal deficit declined from 5.1 to 2.8 percent of GDP (achieving 3-percent medium-term target one year in advance).
  - 2007/08 current deficit at 1.2 percent of GDP, a third of its 2003/04 level.
  - More than two-thirds of the fiscal adjustment over this period due to revenue gains; remainder mostly from declining interest payments.
  - Outstanding liabilities of the central government declined by 4.4 percent of GDP.
- Caveats (augmented/broader indicators):
  - Increased use of subsidy-related bonds to meet current spending needs; these bonds excluded from current spending and authorities’ definition of the deficit.
  - If quasi-fiscal expenditures (subsidy-related bonds) are included, actual fiscal adjustment until 2007/08 is less than headline numbers suggest.
  - Almost no correction on the expenditure side; entire fiscal adjustment driven by enhanced revenue.
  - Even including off-budget subsidy-related expenditure, India was roughly on track to meet the (postponed) FRBMA targets until 2007/08.
- Table 1: Adjustment in Central Government Finances, 2003/04—2008/09 (In Percent of GDP) — selected figures:
  - Total revenue and grants: 2003/04 = 10.2; 2004/05 = 10.2; 2005/06 = 10.1; 2006/07 = 10.9; 2007/08 = 11.8; Cumulative change 2003/04-2007/08 = 1.6; 2008/09 Prov. = 11.0
  - Net tax revenue: 2003/04 = 6.8; 2004/05 = 7.2; 2005/06 = 7.6; 2006/07 = 8.5; 2007/08 = 9.3; Cumulative change = 2.5; 2008/09 Prov. = 8.9
  - Nontax revenue: 2003/04 = 3.3; 2004/05 = 2.9; 2005/06 = 2.4; 2006/07 = 2.3; 2007/08 = 2.4; Cumulative change = -0.9; 2008/09 Prov. = 2.0
  - Total expenditure and net lending: 2003/04 = 15.3; 2004/05 = 14.3; 2005/06 = 14.3; 2006/07 = 14.3; 2007/08 = 14.5; Cumulative change = -0.8; 2008/09 Prov. = 16.8
  - Current expenditure 1/: 2003/04 = 13.8; 2004/05 = 12.7; 2005/06 = 12.7; 2006/07 = 12.8; 2007/08 = 13.0; Cumulative change = -0.8; 2008/09 Prov. = 14.9
  - Capital expenditure and net lending 2/: 2003/04 = 1.5; 2004/05 = 1.6; 2005/06 = 1.6; 2006/07 = 1.5; 2007/08 = 1.6; Cumulative change = 0.0; 2008/09 Prov. = 1.9
  - Overall balance: 2003/04 = -5.1; 2004/05 = -4.1; 2005/06 = -4.1; 2006/07 = -3.4; 2007/08 = -2.8; Cumulative change = 2.3; 2008/09 Prov. = -5.8
  - Overall balance (augmented) 3/: 2003/04 = -5.2; 2004/05 = -4.1; 2005/06 = -4.6; 2006/07 = -4.4; 2007/08 = -3.4; Cumulative change = 1.9; 2008/09 Prov. = -7.1
  - Current balance: 2003/04 = -3.6; 2004/05 = -2.5; 2005/06 = -2.6; 2006/07 = -1.9; 2007/08 = -1.2; Cumulative change = 2.4; 2008/09 Prov. = -4.0
  - Current balance (augmented) 3/: 2003/04 = -3.7; 2004/05 = -2.5; 2005/06 = -3.1; 2006/07 = -2.5; 2007/08 = -1.8; Cumulative change = 1.9; 2008/09 Prov. = -4.2
  - Subsidy-related bonds 4/: 2003/04 = 0.1; 2004/05 = 0.0; 2005/06 = 0.5; 2006/07 = 1.0; 2007/08 = 0.6; Cumulative change = 0.5; 2008/09 Prov. = 1.3
  - Central Government Debt 5/: 2003/04 = 68.4; 2004/05 = 67.9; 2005/06 = 66.1; 2006/07 = 64.2; 2007/08 = 64.1; Cumulative change = -4.4; (2008/09 not shown)
  - Notes: 1/ Includes the surcharge on Union duties transferred to the National Calamity Contingency Fund. 2/ Authorities' treatment of state debt swap scheme (DSS) in 2002-05 shows the prepayment by States of on-lent funds to the center as net lending. The Center's prepayment of its debt to the National Small Savings Fund (NSSF) is treated as a capital expenditure. 3/ Includes subsidy-related bond issuance as current expenditure. 4/ Issued by the central government to the Food Corporation of India, fertilizer producers, and the state-owned oil marketing companies as compensation for losses incurred from the subsidized provision of commodities. 5/ Comprises public sector concessional and non-concessional debt at yearly exchange rates.
- 2008/09 deterioration:
  - Central government deficit set to reach a historical high in 2008/09, eliminating fiscal improvement since FRBMA introduction.
  - Part attributed to fiscal measures since October 2008 estimated at 0.6 percent of GDP and deceleration in tax revenue due to slowdown.
  - However, fiscal deterioration was set to occur well before crisis-related stimulus: 2008/09 budget introduced costly schemes (agricultural debt write-off, expansion of National Rural Employment Guarantee scheme, revision of income tax brackets) and Sixth Pay Commission award implementing a 20 percent hike in government salaries.
  - Subsidy bill increased dramatically with run-up in global commodity prices in first half of 2008.
  - These developments undermined credibility of government commitment to fiscal discipline and suggest revenue gains alone cannot carry fiscal adjustment.

### V. States: rules, adoption patterns, and performance up to mid-2008
- States account for roughly half of the general government fiscal deficit; success of consolidation hinges critically on subnational performance.
- Incentives: TFC provisions for conditional debt restructuring and interest rate relief provided incentives for states to adopt FRLs.
- As of mid-2008, twenty-six of India’s 28 states have enacted FRLs; West Bengal and Sikkim had not enacted FRLs.
- Common FRL features (varied across states):
  - Targets to eliminate the current deficit by 2008/09 and reduce the overall deficit to 3 percent of GSDP by 2009/10 as per TFC suggestions.
  - Annual reduction targets of current and fiscal deficits; measures to enhance transparency; medium-term fiscal policy frameworks.
  - Some states set direct targets for outstanding liabilities as percent of GSDP for a pre-specified future date.
  - Some states introduced expenditure management rules (e.g., limits on state wage bill as share of state own revenue or state current expenditure).
  - A few states imposed limits on incremental guarantees or total outstanding guarantees.
- Adoption pattern correlates:
  - Early adopters more likely to have higher Human Development Indicators, better infrastructure, and more financial development (real credit per capita).
  - States with higher transfer dependence (share of grants and shared revenue in pre-FRBMA period) were slower to adopt FRLs.
  - Borrowing dependence (stock of central government loans to states’ GSDP) and states’ economic characteristics (e.g., reliance on agriculture) not significantly associated with timing of FRL enactment.
- Performance (enactment coincided with consolidation):
  - States’ consolidated deficit more than halved from 4.5 percent of GDP in 2003/04 to 2.5 percent in 2007/08.
  - Aggregate current balance swung from a deficit of 2.2 percent to a surplus (text cuts off before providing full surplus figure).

### VI. Analytical implications and reform direction signaled in text
- The FRBMA strengthened India’s fiscal policy framework but implementation issues remain: postponed deadlines, increased off-budget activities, slippages in deficit targets, and reliance on revenue gains rather than expenditure reform.
- The paper suggests that fiscal rules need complementary reforms to strengthen fiscal discipline; a proposed simple fiscal rule is anchored on a medium-term debt target with annual nominal expenditure growth rules to:
  - Tackle the deficit bias at its core.
  - Allow room for macroeconomic stabilization through automatic stabilizers.

_Italic: Source: Excerpt from _wp09175 - References (PDF) provided by the IMF._

### 0.5 percent of GDP, a correction of 2.7 percent of GDP. The levels of debt of the states also

### _wp09175 - 0.5 percent of GDP, a correction of 2.7 percent of GDP. The levels of debt of the states also

### State-level fiscal consolidation: outcomes and drivers
- Aggregate states’ fiscal deficit declined by 2 percent of GDP between the periods reported, driven largely by revenue increases.
- More than three-quarters of the 2 percent of GDP decline in the states’ aggregate fiscal deficit was due to an increase in state revenue.
- Gain in own tax revenue: 0.4 percent of GDP (reflecting VAT implementation by the majority of states and improved tax administration).
- Non-tax revenue: marginal decline (exact change reported as -0.1 percent of GDP in the table for 2003/04-2007/08 cumulative change).
- Reduction in current expenditure: 0.6 percent of GDP, entirely from declining interest payments.
  - Interest payments decline: -0.7 percent of GDP (2003/04-2007/08 cumulative change in Table 2 shows interest payments falling by -0.7 percent of GDP).
- State government debt: decline of 4.8 percent of GDP (Table 2: State government debt 33.2 → 28.4; cumulative change -4.8).
- State government guarantees: declining trend reported (Table 2 shows 8.0 then 6.5 then 5.5, noted as downward path).
- Net resources transferred from central government increased cumulatively by 1.0 percent of GDP (Table 2: Net resources transferred from central government change 1.0).
- Overall balance as percent of GDP (Table 2):
  - 2003/04: -4.5
  - 2004/05: -3.5
  - 2005/06: -2.5
  - 2006/07: -1.9
  - 2007/08: -2.5
  - Cumulative change 2003/04-2007/08: 2.0
  - 2008/09 B.E.: -2.4
- Revenue balance (Table 2):
  - 2003/04: -2.2
  - 2004/05: -1.2
  - 2005/06: -0.2
  - 2006/07: 0.6
  - 2007/08: 0.5
  - Cumulative change 2003/04-2007/08: 2.7
  - 2008/09 B.E.: 0.5
- Cumulative finding: the overall deficit excluding central transfers and interest payments shows a modest decline of 0.3 percent of GDP (stated explicitly in text).

### Heterogeneity across states and the role of central transfers
- Substantial variation across states in sources of correction to current deficits between 2000/01-2002/03 and 2005/06-2007/08:
  - Decomposition components: (i) increase in own revenue, (ii) increase in central government transfers, (iii) decrease in current expenditures.
- Aggregate pattern: fiscal correction has been revenue-led with a large role played by higher central government transfers.
- Only 4 out of the 17 major states managed to decrease non-interest current expenditure as a share of GSDP over the period analyzed.
- The importance of central transfers creates potential vulnerability: projected slowdown in economic growth in 2008/09 and 2009/10 likely to be a setback for fiscal consolidation at both state and center levels (text statement).

### Empirical evidence on fiscal rules (FRLs) at the state level
- Methodology:
  - Constructed a time-varying state-specific post-FRL indicator (interaction of ever-enacted FRL and post-enactment period).
  - Dependent variable: current deficit as a share of GSDP, refined by excluding central transfers and interest payments to capture states’ own fiscal effort.
  - Controls: year fixed-effects, state fixed-effects, log(state GSDP), lagged debt-GSDP ratio, VAT implementation indicator; some specifications use Arellano-Bond estimator and include lags of dependent variable.
- Main empirical findings:
  - Conventional measure of current deficit significantly declines once a state adopts an FRL (columns (1)-(3) in Table 3).
  - When current deficit is refined to exclude central transfers and interest payments (columns (4)-(9)), the coefficient on post-FRL indicator becomes statistically insignificant and declines substantially in magnitude.
  - Conclusion: fiscal rules do not appear to be associated in a statistically significant manner with greater fiscal adjustment at the state level when focusing on states’ own-resource effort.
- Heterogeneity by FRL design features (Table 4):
  - Post * FRL * Debt Target: interactions negative and in some specifications statistically significant (e.g., column showing -0.0083** and -0.0076*), suggesting stronger disciplining effect where laws include explicit debt targets.
  - Post * FRL * Expenditure Target: interactions negative and statistically significant (e.g., -0.0158**, -0.0063**, -0.0059**), suggesting stronger consolidation where expenditure targets exist.
  - Post FRL Enactment * Compliance Frequency: not associated with differential fiscal performance (coefficients not significant).
  - Interpretation caveat: endogeneity of law adoption and state law characteristics limits causal interpretation; results are correlations that provide guidance on potentially effective design features.

### Control over state financing and associated risks
- Financing composition of states’ fiscal deficit (Table 6, percent of total financing):
  - Market borrowings (net, Article 293 permission): varied across years (27.9, 38.4, 31.1, 17.0, 16.5, 54.6, 50.0).
  - Loans from center (net, controlled): values include -2.0, -27.6, -29.8, -4.0, 2.4, 3.3, 1.2 (percent of total).
  - Securities issued to NSSF (uncontrolled): 51.2, 54.6, 80.0, 81.9, 70.5, 8.2, 17.3 (percent of total).
  - Other (uncontrolled): 23.0, 34.6, 18.7, 5.0, 10.5, 33.9, 31.5 (percent of total).
- Significant share of state financing has been from “uncontrolled” sources (e.g., securities to NSSF, other instruments), which can weaken central macroeconomic control and create hidden fiscal risks.
- Some forms of borrowing (e.g., small savings schemes, public accounts deposits, guarantees for SPVs) have provided as much as 40-50 percent of total financing in recent years (text statement).

### Assessment of India's central fiscal rule framework (FRBMA): strengths and weaknesses
- Strengths:
  - Emphasis on procedural rules: adoption of a medium-term fiscal framework and enhanced transparency requirements.
  - These procedural features align with frameworks in advanced countries and have contributed to improved fiscal management.
- Weaknesses and areas for strengthening:
  - Absence of well-defined accounting definitions for target fiscal indicators:
    - Supporting rules do not contain exact definitions of concepts underpinning prescribed fiscal indicators.
    - Ambiguities have enabled creative accounting (example: meeting current expenditure via issuance of special bonds).
  - Insufficient transparency in budget preparation:
    - Numerical targets not supported by comprehensive medium-term expenditure plans.
    - Assumptions underpinning budgets often lack annual forecasts for key macroeconomic variables (GDP growth, inflation, imports, exports, exchange rate).
    - Insufficient discussion and disclosure of fiscal risks, including contingent liabilities from PPPs and guarantees.
  - Focus on deficit-type targets:
    - Targeting current balance can promote procyclicality and may bias spending against human capital investments; can allow misclassification of current vs. capital spending.
  - Lack of expenditure rules and explicit debt target:
    - Despite buoyant revenues, general government debt fell only by 7-8 percent of GDP; general government debt at 80 percent of GDP as of March 2008 (text).
  - Absence of well-defined sanctions for noncompliance:
    - Enforcement relies on reputational loss; no explicit automatic penalties for missed targets.
  - Widely defined escape clauses:
    - Escape clauses permit breaches for natural disaster, security, or other circumstances, and corrective measures trigger only for very large deviations—risk of frequent suspension or postponement of targets.
  - No independent assessment of compliance with FRBMA:
    - No ex ante or ex post independent assessments of statistical/accounting standards and fiscal rule compliance.
    - Historical budget forecast errors: revenues tended to be systematically overestimated (2000/01-2005/06) or underestimated (2006/07-2007/08); expenditures consistently underestimated, particularly when off-budget bond issuance included (Table 5 shows Outturn/Budget ratios).
- Table 5 key budget implementation figures (percent of GDP):
  - Revenue: Budget 9.9, 10.5, 10.6, 10.5, 11.7; Outturn 10.2, 10.2, 10.1, 10.9, 12.5; Outturn/Budget 104, 98, 98, 101, 107 for the years shown.
  - Expenditure: Budget 16.0, 15.0, 14.9, 14.2, 15.0; Outturn 15.4, 14.3, 14.7, 15.3, 15.9; Outturn/Budget 97, 95, 99, 108, 106.
  - Fiscal balance (Budget): -6.1, -4.6, -4.3, -3.7, -3.3; Outturn: -5.2, -4.1, -4.6, -4.4, -3.4; Outturn/Budget 86, 92, 109, 123, 105 (table averages and longer-run columns also provided).
  - Note: Table 5 includes off-budget bond issuance in expenditure figures.

### International best-practice features for effective fiscal rules (as summarized)
- Key design and implementation features that enhance fiscal rule effectiveness:
  - Clarity of definition: clear constrained indicator, institutional coverage, escape clauses.
  - Transparency: disclosure of accounting, forecasting, institutional arrangements.
  - Simplicity: ease of communication and enforcement.
  - Flexibility: allow accommodation of exogenous shocks; examples include cyclically adjusted balances or escape clauses for extreme events.
  - Adequacy and internal consistency: rules should align with goals and other macro policies (e.g., debt and expenditure linkages).
  - Enforceability: legal basis and sanctions for noncompliance often needed, not just reputational costs.
  - Independent monitoring: fiscal councils or independent institutions for objective analysis, forecasts, and assessments.
  - Adequate supporting policy measures: e.g., structural reforms (pension, subsidies) to make rules sustainable.
  - Effective Public Financial Management support: to monitor and control budget execution.
  - Medium-term fiscal frameworks: provide open public discussion and commitment mechanisms.

### Policy implications and directions highlighted
- Aggregate states’ consolidation masks modest own-state effort; central transfers were a major driver of improvement.
- The projected slowdown in economic growth in 2008/09 and 2009/10 is likely to undermine fiscal consolidation at both state and central levels.
- Design features that may increase FRL effectiveness in the Indian context:
  - Incorporate explicit debt targets and expenditure rules in state FRLs, as these design features are correlated with stronger fiscal consolidation in the empirical analysis.
  - Improve accounting definitions and close loopholes that permit creative accounting (e.g., special bonds for subsidies).
  - Enhance transparency in budget preparation, including explicit forecasts for key macro variables and disclosure of fiscal risks and contingent liabilities (e.g., PPP-related risks).
  - Consider introducing independent assessment mechanisms (fiscal council-like functions) for ex ante and ex post compliance evaluation and unbiased forecasts.
  - Reassess the prominence of deficit-type targets (e.g., current balance) and consider complementary debt or expenditure targets to reduce procyclicality and misclassification incentives.
  - Strengthen enforceability through clearer sanctions or corrective mechanisms to increase compliance credibility.
  - Address intergovernmental fiscal relations: reduce fragmentation and uncontrolled financing channels to limit hidden borrowing and contingent liabilities; revisit transfer and borrowing regimes to improve incentives for subnational fiscal discipline.
- Recommended sequencing: reestablish fiscal discipline at the center as macroeconomic conditions permit, given the central role of the center in promoting fiscal prudence.

*Italic: Source: Content excerpt from _wp09175 (IMF staff paper PDF content provided).*

### 1.      To reduce opportunities for creative accounting and biased forecasts.

### 1.      To reduce opportunities for creative accounting and biased forecasts.

### Independent accounting standards and scorekeeping
- Define precisely the accounting framework and definitions for target fiscal indicators; adopt an international standards budget classification (such as GFSM (2001)) and reform the chart of accounts to be fully consistent with it to curb creative accounting.
- Empower an independent scorekeeper (expand existing agencies such as Controller Accountant General and Controller Auditor General before creating a new one). The autonomous scorekeeper could:
  - provide and assess compliance with standardized accounting standards for all levels of government;
  - prepare objective and timely reports that verify compliance with the FRBMA and other budgetary rules and targets.
- Role modeled on EUROSTAT in the European Union.

### Expanding fiscal coverage and transparency
- Expand coverage of fiscal accounts and target fiscal indicators:
  - bring all subsidy-related expenditures above the line;
  - gradually include public enterprises that pose fiscal risks and accounts of special purpose vehicles (such as PPPs) at central and subnational levels.
- Increase transparency of fiscal policy:
  - new FRBMA numerical targets should be supported by a concrete underlying plan of short- and medium-term policy measures for revenues and expenditures and discussed in FRBMA policy statements;
  - budget assumptions should include annual forecasts over a medium-term horizon for key macroeconomic variables such as GDP growth, inflation, imports, exports and the exchange rate;
  - budget documents should discuss fiscal risks and potential responses (including a statement of fiscal risks, as done in Indonesia) to improve market monitoring and pricing of risks.

### Medium-term focus on debt sustainability: debt and expenditure growth targets
- Set a medium-term debt target and debt reduction path. Given the FRBMA objective of ensuring fiscal sustainability, a direct rule on gross public debt should be logical for the FRBMA successor.
  - The debt target level requires judgment about sustainable debt levels and India’s debt tolerance; emerging markets tend to have less debt tolerance than advanced economies.
  - The debt target should be prudently defined to allow room for discretionary countercyclical fiscal policy if automatic stabilizers are not sufficient.
- Complement the debt target with a consistent nominal expenditure growth rule:
  - Given the target debt path and a projected revenue path based on conservative trend GDP growth, compute a nominal expenditure path and implied nominal expenditure growth ceilings from the government budget constraint.
  - Expenditure rules let automatic stabilizers operate in downturns and induce saving of windfall gains during upturns without requiring specific cyclical adjustment methods.
  - Advantages: conceptually simple, transparent, predictable for policymakers, tackles deficit bias by controlling expenditures, associated with lasting fiscal consolidations.
- Consider specific expenditure rules for vulnerable spending categories:
  - e.g., capital spending or critical recurrent spending such as operations and maintenance are easy targets for cuts; introduce specific rules on these categories or exclude them from expenditure aggregate—trade-off between complexity and vulnerability to creative accounting.

### Preventing misuse of escape clauses and enforcing compliance
- Revise escape clauses to limit them to specific extreme events and eliminate loopholes where possible.
- Impose institutional and personal penalties for breaching numerical and procedural rules; require a clearly defined time period for government and parliament to restore conformity.
- Consider automatic and time-bound mechanisms to correct deviations (pre-set prioritization of cuts if agreement cannot be reached). Example: Brazil instituted across-the-board cuts to reestablish conformity.

### Independent fiscal council
- Consider setting up an independent fiscal council to assist with ex-ante and ex-post monitoring of fiscal rules; provide independent normative assessments, monitor escape clause use, and provide objective analysis of fiscal policies.

### Strengthening subnational fiscal responsibility
- Ensure reforms of subnational FRLs are consistent with central reforms: well defined targets and statistical standards, enhanced fiscal transparency, debt target cum expenditure rule combination, independent compliance assessment, and stronger automatic correction mechanisms and sanctions.
- Define subnational debt targets consistent with national debt reduction objectives and repayment capacity of states (example: Brazil’s national debt to net revenue ratio).
- Ensure timely and reliable reporting of subnational fiscal operations.
- Combine fiscal rule reforms with other strategies:
  - eliminate large nonmarket-based and captive sources of financing (statutory liquidity requirements for banks to hold state paper, compulsory National Small Savings fund investment in state paper, borrowing from state employees’ pension fund);
  - establish firm commitment to a no-bailout policy;
  - promote cooperative approaches (e.g., transform bi-annual State Finance Secretaries conference into forum for FRL reforms and borrowing ceilings consistent with national objectives);
  - continue intergovernmental fiscal reforms to reduce states’ dependence on central transfers, simplify transfers, and review design based on needs and fiscal capacity of different states.

### Appendix I — illustrative fiscal rule example (India)
- Framework ingredients:
  - (i) set a medium-term debt target and debt reduction path;
  - (ii) complement the debt target with annual nominal expenditure growth rules computed from the government budget constraint given projected revenue and trend GDP growth;
  - (iii) decide on a debt-feedback mechanism allowing revisions to nominal expenditure growth ceilings if actual debt deviates significantly from the desired path.
- Illustrative anchor: lower India’s general government debt from 82 percent of GDP as of end 2009/10 to 65 percent of GDP by 2015/16, assuming implementation begins in 2010/11; debt norm is back loaded.
- Assumptions and computed ceilings used in the illustration:
  - trend potential GDP growth of 8 percent (with annual growth averaging roughly 7.7 percent over the period);
  - real interest rate at 4 percent;
  - constant elasticity of total general government receipts with respect to nominal GDP equal to 1.03;
  - a nominal annual non-interest expenditure growth rate of 9.8 percent would bring the debt-to-GDP ratio to 65 percent by 2015/16.
- Rules for adjustment:
  - a constant maximum nominal expenditure growth ceiling is calculated and binding;
  - adjustments allowed only when actual public debt deviates by more than 4.5 percentage points of GDP from the desired path;
  - if the revision is triggered, the expenditure growth rule is reset so the medium-term debt target is achieved over the remainder of the period.
- Comparative analysis setup:
  - A general government deficit of 4.9 percent of GDP is consistent with achieving the debt target given the assumed trend GDP growth.
  - Three scenarios considered for comparison with a constant deficit rule:
    - (i) a relatively mild business cycle around trend GDP growth of 7.7 percent;
    - (ii) an amplified business cycle around the trend;
    - (iii) a slow recovery towards potential GDP growth (cumulative output gap remains negative), using medium-term real growth projections as in the India Article IV staff report 2008.
  - Indicators used to compare rules: (i) root mean squared deviation from the debt norm; (ii) mean deviation from the norm; (iii) deviation from the medium-term debt target in the final year (2015/16).
  - Procyclicality assessed by plotting change in the primary balance (fiscal impulse) against deviations of real growth from trend; procyclical impulse = improvement in primary balance during bad times and deterioration during good times.

*Content based solely on the supplied IMF excerpt.*

### Appendix Figure 1. India: Simulated D

### Appendix Figure 1. India: Simulated Debt Path Under Alternative Fiscal Rules and Business Cycle Scenarios, 2009/10–2015/16

### Key comparisons of fiscal rules (summary)
- Two fiscal rules are compared with a constant general government deficit rule:  
  - A fiscal rule based on a debt target and implemented through annual expenditure rules (referred to as "expenditure rules").  
  - A constant general government (GG) deficit rule ("constant GG deficit").
- Main qualitative findings:
  - The expenditure rules exhibit less procyclical bent than a constant deficit rule.  
    - In all scenarios, the very sharp fiscal consolidation imposed by the constant deficit rule in 2010/11 implies a large negative fiscal impulse when growth is either below trend (case 3) or right at trend.  
    - Under the constant deficit rule, fiscal policy loosens when above-trend growth would force extra savings under the expenditure rules (2012/13–2014/15).  
    - The superior cyclical properties of the expenditure rules are most visible in the case of the negative output shock/IMF staff growth projections (case 3). In all years, the constant deficit rule implies a procyclical fiscal stance. While the expenditure rules do not exclude all procyclical responses (for example in the first year, the primary balance improves despite below-trend growth), as growth accelerates, so does the extent of primary balance improvement.
    - Under the negative output shock/IMF staff growth projections scenario, the debt-feedback mechanism is triggered in 2014/15 as the actual debt level exceeds the debt norm by more than 4½ percentage points of GDP. Resetting the expenditure rules so that the medium-term objective can be met leads to larger consolidation in the last two years, precisely when real growth exceeds trend.
  - Precision in targeting the 2015/16 debt objective:  
    - The two rules entail a relatively similar precision in targeting of the 2015/16 debt objective, and the annual debt norm. The expenditure rule is, if anything, closer to the debt norm both in terms of the root mean square deviation as well as the mean error from the desired debt path. However, this is sensitive to the choice of the debt norm.

### Appendix Table 1 (as reported)
- Appendix Table 1.Comparative Performance of Alternative Fiscal Rules for India, 2010/11—2015/16
- Reported lines (preserving original numeric strings and ordering):
  - Constant GG deficit 
  - Debt Target + Nominal Growth of Spending Rules
  - Root mean square deviation with respect to the norm path 1/3.111.58
  - Mean error with respect to the norm path 1/-2.801.26
  - Difference from 65 percent in 2015/160.02-0.06
  - Root mean square deviation with respect to the norm path 1/3.132.42
  - Mean error with respect to the norm path 1/-2.781.53
  - Difference from 65 percent in 2015/160.04-0.15
  - Root mean square deviation with respect to the norm path 1/2.673.05
  - Mean error with respect to the norm path 1/-2.362.65
  - Difference from 65 percent in 2015/16-0.150.00
  - 1/ In percent of GDP.
  - Staff Growth Projections / Negative Output Shock
  - Amplified Cycle
  - Business Cycle

### Observed fiscal dynamics and scenarios (figures/text elements preserved)
- Scenarios and series shown in the figure panels (labels preserved as in source):
  - Public Debt, Business Cycle
  - Public Debt, Amplified Cycle
  - Public Debt, IMF Staff Projections for Growth
  - Output Gap (percent), Business Cycle
  - Output Gap (percent), Amplified Cycle
  - Output Gap (percent), IMF Staff Projection
  - Deviation from trend growth and Change in Primary Balance, Business Cycle
  - Deviation from trend growth and Change in Primary Balance, Amplified Cycle
  - Deviation from trend growth and Change in Primary Balance, IMF Staff Projection
- Fiscal impulse series names preserved:
  - Fiscal Impulse - Constant GG Deficit
  - Fiscal Impulse - Expenditure Rules
  - Deviation from Trend Growth
  - Fiscal Impulse - Constant GG Deficit (Right Scale)
  - Fiscal Impulse - Expenditure Rules (Right Scale)
- Legend categories (preserved):
  - Expenditure Rules - Business Cycle
  - Expenditure Rules - Amplified Business Cycle
  - Expenditure Rules - Negative Output Shock
  - Debt Norm
  - Constant GG Deficit

### Policy-relevant implications (from analysis)
- Expenditure rules can better insulate fiscal policy from the business cycle, reducing procyclicality compared with a fixed deficit rule, particularly under negative output shocks or weaker-than-trend growth.  
- Debt-feedback mechanisms under expenditure rules may trigger stronger consolidation late in the simulation horizon if actual debt deviates sufficiently from the debt norm (example: trigger in 2014/15 when debt exceeds the norm by more than 4½ percentage points of GDP).  
- Choice of debt norm materially affects which rule appears closer to the desired debt trajectory (sensitivity noted in the comparison).

*Source: Appendix Figure 1 and Appendix Table 1, _wp09175 - Appendix Figure 1. India: Simulated Debt Path Under Alternative Fiscal Rules and Business Cycle Scenarios, 2009/10–2015/16.*

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