Time-series properties of state-level public expenditure

Public expenditure reform must be underpinned by some understanding of the time-series properties of public expenditure. This paper examines the univariate properties of aggregate revenue expenditure at the level of State governments in India over the period 1974-98 for three states: Punjab, Haryana and Maharashtra. The empirical exercise is performed on the logarithmic transformation of aggregate revenue expenditure in terms of nominal (rather than ex post real) expenditure, not normalised to State Domestic Product, for reasons justified in the paper, and is confined to the aggregate for lack of a breakdown of the series by economic classification. The data are adjusted for notional entries and other distortionary budgetary practices. There is trend stationarity in Punjab and Haryana, with a deterministic trend growth rate of 16-17 per cent, and clear evidence thereby of fiscal smoothing in the presence of periodic upward shocks of Pay Commission or other origin. In Maharashtra by contrast, aggregate expenditure carries a unit root, with no deterministic trend, and no drift term; expenditure shocks of other than Pay Commission origin appear to have been enabled with no corresponding smoothing, but there is sharp and concurrent smoothing at the time of the Pay Commission shocks, such that aggregate expenditure does not show a spike. The issue of whether the fiscal smoothing in each case was unproductive or productive remains unrevealed in the aggregate figures.