Abstract
Recent empirical studies analyzing macroeconomic volatility concluded that fiscal policy in developing countries tends to be pro-cyclical, which in turn negatively affects poverty reduction. In the following discussion, we estimate the structural fiscal deficits from 1970 to 2008 and assess the cyclical behavior of the fiscal policies of the central and state governments in India. Our simple analysis shows that (a) the fiscal policies of the central and state governments are not countercyclical and not effective in reducing macroeconomic volatility, but that (b) the expenditure policies of central and state governments tend to be countercyclical during the bad times, and (c) if one considers the institutional disadvantage of the state governments, there are no significant differences in the cyclical behavior of the fiscal policies between state and central governments.
