Estimating forecasting errors in Kerala budgets

Research by Ruzel Shrestha and Lekha Chakraborty of NIPFP:

Our paper analyses the subnational public finance practices in one of the States in India –Kerala- and estimate the fiscal marksmanship. Fiscal marksmanship is the analysis of fiscal forecasting errors. Kerala, though well known for its achievements in human development outcomes, is facing fiscal stress within the rule-based fiscal framework and innovating policy tools to achieve a revenue-led fiscal consolidation.

We have examined the Budget Estimates, Revised Estimates and Actuals for the macro-fiscal variables from Kerala State Budgets, for the period from 2011-12 to 2016-17 to analyse deviations between the projections and actual realizations. We found that the magnitude of forecasting errors
was significant in case of tax revenue.

While partitioning the sources of errors in the budgetary forecasting in Kerala, we observed that the random components of the error were larger than the systematic components for all the macro-fiscal variables, except for grants, own revenue and capital expenditure. This has three macro policy implications.

One, the volatility in intergovernmental fiscal transfers can affect the stability of finances at subnational level. Two, the State needs to identify innovative policy tools for Additional Resource Mobilisation (ARM) to maintain the human development achievements.

Three, within the rule-based fiscal framework, State has to innovate financing strategies for strengthening growth-inducing capital infrastructure formation.


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