State-level Fiscal Multipliers in India: Local Fiscal Multiplier Approach

Movements of fiscal multipliers of an economy have long assumed prominence in the fiscal policy literature in general and for States in particular, keeping in view their interconnectedness in terms of inter-State trade and migrations, notwithstanding the States having their own fiscal policies with considerable autonomy. The State economies have a strong interdependence, as the government spending in one State can easily spill over to other States. So far, there is no research in India that has considered spillover while estimating the State-level multiplier. This paper contributes to the literature by estimating State-level fiscal multipliers accounting for the spillover effects in terms of the impact of government expenditure on gross state domestic product (GSDP). A key insight that the paper also confirms is that the estimates of state-level fiscal multipliers are the same during cyclical upturns and downturns.