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Indian fiscal policy: A Possible escape route

Author

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  • Ashima Goyal

    (Indira Gandhi Institute of Development Research)

Abstract

Historical choices, based on the interaction of domestic structure, including federalism, with global shocks and dominant ideas have left India a legacy of deficits and debt higher than peer countries. These are constraints on fiscal policy. But pragmatic choices made recently have created degrees of freedom despite continuing shocks. Better expenditure-composition, with gradual deficit-reduction, is creating human and physical capital towards inclusive and therefore sustainable growth. Inflation-lowering short and long-term supply-side action is enabling good coordination with monetary policy and countercyclical smoothing of shocks, so that real volatility reduces and interest rates stay below growth rates. Leveraging this snowball effect, as well as reduction in primary deficits, is the fastest path to bring down debt ratios. But it is necessary to bring states on board. Strengthening institutions and incentives can reduce competitive fiscal populism, and improve compliance in lower tiers of government.

Suggested Citation

  • Ashima Goyal, 2023. "Indian fiscal policy: A Possible escape route," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2023-010, Indira Gandhi Institute of Development Research, Mumbai, India.
    • Handle: RePEc:ind:igiwpp:2023-010
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    File URL: http://www.igidr.ac.in/pdf/publication/WP-2023-010.pdf
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    More about this item

    Keywords

    Expenditure composition; supply-side action; inclusive growth; countercyclical; coordination; snowball effect; federalism; populism;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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