Do Fiscal Regimes Matter for Fiscal Sustainability in India?

ABSTRACT Governments, economists, and policymakers in India have long been concerned about India's unsustainability of public debt. Therefore, the present study seeks fresh evidence of India's fiscal sustainability from 1980–81 to 2020–21. This study employs linear (model‐based) and three non‐linear models (quadratic, cubic, and kinked) to examine the fiscal sustainability in India. The regime changes are quantified using a ‘regime‐switching model‐based fiscal stability test’ that does not consider the linear fiscal response function method. The findings from the analysis point to a statistically significant fiscal sustainability outcome for the linear model but not for the non‐linear model. There is also the sign of a ‘regime‐switching’ fiscal rule in India from 1980–81 to 2020–21. The unsustainable fiscal regime has been identified only in three periods: 1983–84 to 1993–94, 2009–10 to 2012–13, and 2018–19 to 2020–21. For other periods, sustainable regimes are evident. The study finds that India's fiscal policy satisfies the ‘non‐Ponzi game condition’, as revealed by the regime‐specific reaction coefficients and the average periods of fiscal regimes. However, the country's long‐term fiscal sustainability has been jeopardised, as the debt‐stabilising condition is strictly violated. Regime‐based insensitivity, which results in an unsustainable fiscal regime lasting for more than 3 years, might expose the country to long‐term fiscal unsustainability.