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The Challenge of Fiscal Adjustment in a Democracy

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  • Ricardo Hausmann
  • Catriona Purfield

Abstract

India''s fiscal problem has deep roots in its federal fiscal system, where multiple players find it difficult to coordinate adjustment. The size and closed nature of the Indian economy, aided by its deep domestic capital market and large captive pool of domestic savings, has disguised the cost of fiscal laxity and complicated the building of a consensus on reform. The new fiscal responsibility act establishes a new rules-based system to overcome this coordination failure. To strengthen the framework, we recommend an autonomous scorekeeper and the extension of similar rules to the state governments as part of a comprehensive reform of the federal system.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/168.

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Length: 30
Date of creation: 01 Sep 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/168

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Keywords: Fiscal management; Fiscal reforms; fiscal policy; budget management; fiscal responsibility; fiscal imbalances; decentralization; government deficit; fiscal discipline; tax revenue; fiscal performance; fiscal federalism; debt service; budget estimates; capital expenditure; budget institutions; public debt; government expenditure; fiscal rules; central government budget; government revenue; government finances; fiscal adjustment; intergovernmental transfers; fiscal consolidation; budget rules; debt burden; tax burden; taxation; government spending; tax revenues; budget execution; fiscal deficits; debt-service; accounting standards; fiscal transfers; fiscal decentralization; fiscal target; government finance; general government expenditure; budget process; government guarantees; budget constraint; fiscal structure; tax bases; budget systems; public finance; budgetary rules; fiscal deficit; foreign debt; state budget; budgetary institutions; fiscal impact; fiscal sustainability; fiscal issues; tax share; budget deficits; budget office; budget implementation; spending cuts; budget constraints; central government deficit; fiscal transparency; government budget; government finance statistics; fiscal crises; fiscal targets; fiscal risk; fiscal imbalance; tax ratio; fiscal responsibility law; fiscal system; fiscal activities; budgetary authority; fiscal responsibility frameworks; federal spending; fiscal aggregates; fiscal problem; fiscal adjustment effort; federal fiscal system; fiscal policies; fiscal measures; fiscal indicators; fiscal revenues; budget deficit; current expenditures; national budget; tax base; expenditure adjustment; central fiscal; tax incentives; central government debt; central government support; budget formulation; expenditure cuts; fiscal expansions; budgetary system; primary deficit; government securities; public deficits; central government revenue; fiscal consolidations; fiscal situation; public spending; tax effort; budget discipline; tax administration; fiscal risks; additional fiscal resources; contingent liabilities; fiscal responsibility act; fiscal resources; fiscal balance; fiscal laxity; tax rates; fiscal crisis; fiscal policy target;

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References

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  1. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
  2. Jonathan Eaton & Raquel Fernandez, 1995. "Sovereign Debt," NBER Working Papers 5131, National Bureau of Economic Research, Inc.
  3. Ricardo Hausmann & Alberto Alesina & Rudolf Hommes & Ernesto H. Stein, 1998. "Budget Institutions and Fiscal Performance in Latin America," Research Department Publications 4160, Inter-American Development Bank, Research Department.
  4. Ernesto Stein & Ernesto Talvi & Alejandro Grisanti, 1998. "Institutional Arrangements and Fiscal Performance: The Latin American Experience," NBER Working Papers 6358, National Bureau of Economic Research, Inc.
  5. Ila Patnaik & Ajay Shah, 2005. "Interest-rate risk in the Indian banking system," Risk and Insurance 0501003, EconWPA.
  6. Catriona Purfield, 2004. "The Decentralization Dilemma in India," IMF Working Papers 04/32, International Monetary Fund.
  7. Ernesto H. Stein & Ernesto Talvi & Alejandro Grisanti, 1998. "Institutional Arrangements and Fiscal Performance: The Latin American Experience," IDB Publications 6435, Inter-American Development Bank.
  8. Poterba, James M, 1994. "State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 799-821, August.
  9. International Monetary Fund, 1996. "Budget Processes and Commitment to Fiscal Discipline," IMF Working Papers 96/78, International Monetary Fund.
  10. Ebel, Robert D. & Yilmaz, Serdar, 2002. "On the measurement and impact of fiscal decentralization," Policy Research Working Paper Series 2809, The World Bank.
  11. Alberto Alesina & Roberto Perotti, 1995. "The Political Economy of Budget Deficits," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 1-31, March.
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Citations

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Cited by:
  1. Singh, Nirvikar, 2006. "State Finances in India: A Case for Systemic Reform," Santa Cruz Department of Economics, Working Paper Series qt8560h76z, Department of Economics, UC Santa Cruz.
  2. Valeriya Dinger & Sven Steinkamp & Frank Westermann, 2012. "The Tragedy of the Commons and Inflation Bias in the Euro Area," CESifo Working Paper Series 4036, CESifo Group Munich.
  3. Rode, Sanjay, 2010. "Fiscal regulation and expenditure pattern in Maharashtra state," MPRA Paper 28836, University Library of Munich, Germany, revised 31 Dec 2010.
  4. Valeriya Dinger & Sven Steinkamp & Frank Westermann, 2014. "The Tragedy of the Commons and Inflation Bias in the Euro Area," Open Economies Review, Springer, vol. 25(1), pages 71-91, February.

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