Institute for Social and Economic Change
Working Paper: 335
Ricardian Approach to Fiscal Sustainability in India
There are several approaches to assess sustainability of a country’s public finance. Ricardian Equivalence (RE) is one such approach, in which fiscal sustainability (FS) is defined in terms of neutrality of generational welfare by government fiscal policy. The present work is an attempt to discuss and analyze the FS of India in the context of RE. Different forms of empirically testable equations for testing RE are derived based on studies by Buiter and Tobin (1978), Kormendi (1983) and Kormendi and Meguire (1990). Based on availability of data, the empirical evidences are against the RE hypothesis, and hence the fiscal policy pursued during the study period (1974-2011) had been detrimental to generational welfare neutrality. One of the key aspects of FS is to ensure generational equity as reflected in the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 in India. However, the empirical findings convey that fiscal policy had been unsustainable in the terms of generational equity in India.