This paper examined fiscal dominance in the Indian context by measuring the impact of Centre’s primary fiscal balance on real interest rates and real GDP growth rate in the VECM framework. It was observed that an improvement in fiscal balance had a positive impact on real interest rate prior to 2003, and in the subsequent periods it turned negative. With regard to the impact of primary fiscal balance on real growth rate, it was observed that the period of 1978-2003 remained a period of dominant fiscal presence and an improvement in fiscal balance i.e. a reduction in fiscal deficit had a positive growth effect. The period following 2003, there was no evidence of fiscal dominance in the Indian economy.

 

Keywords: VECM, Cholesky impulse response, fiscal dominance, FRBM

JEL classification: E52, E62, H62