Fiscal Sustainability Heterogeneity in Indian States: Evidence from Bohn Reaction Functions, Panel Quantile Regression and Dynamic IV Estimation

This study examines fiscal sustainability heterogeneity across 15 Indian states using FY2022–2023 cross-sectional data and a 2017–2021 panel. A tri-ratio debt sustainability analysis (DSA) framework applying debt-to-GSDP, interest payments-to-revenue (IPRR), and fiscal deficit-to-GSDP ratios is supplemented by scenario stress-testing, Bohn (1998) fiscal reaction functions estimated at the state level, panel quantile regression, Anderson–Hsiao IV dynamic panel estimation and spatial autocorrelation testing. Of 15 states, 14 breach at least one DSA threshold; 10 remain structurally stressed even under optimistic macroeconomic conditions. A GLSAR panel model with HC3 robust errors establishes that interest payments dominate liability accumulation ( β 2 / β 1 ≈ 5.2; R 2 = 0.919). Seven states show unsustainable Bohn fiscal reactions ( ρ < 0); the interest payment effect intensifies non-linearly at higher debt quantiles ( β 2 49% larger at the 75th than the 25th quantile); and dynamic IV estimation confirms near-unit debt persistence ( α = 0.990), ruling out incremental consolidation as sufficient. Spatial autocorrelation tests confirm the trap is state-specific, not geographically contagious. The findings support differentiated Finance Commission conditionality targeting each state’s debt structure rather than uniform fiscal rules. JEL Classification: H63, H74, H68, E62, C33