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Puzzles in Indian performance: deficits without disasters

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  • Goyal, Ashima

Abstract

The paper explores puzzles in Indian growth performance such as the prolonged period of below potential growth in the late nineties. Uneven investment was a major explanation. Risk aversion and adverse expectations prevented investment from rising. Since sufficient domestic and foreign savings were available to compensate for government borrowing, the high fiscal deficit did not crowd out private investment or raise risk and interest rates. A sign of the absence of excess demand was that the fiscal deficit did not lead to a current account deficit. The problem was that, partly because of structural rigidities, monetary-fiscal policy was unable to create the conditions to absorb the foreign savings made available. High volatility in nominal interest and exchange rates raised risk and amplified exogenous shocks. The second factor raising uncertainty was that exposing manufacture to international competition was delayed too long. The smooth fall in Indian nominal interest rates after 2001, and rise in infrastructure spending, succeeded in stimulating higher industrial growth by 2003, and lowering fiscal deficits. Macropolicies can stimulate growth, make it easier to undertake deep reform, and the latter can reinforce growth, allowing it to reach potential.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 29201.

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Date of creation: 2005
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Handle: RePEc:pra:mprapa:29201

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Related research

Keywords: growth; open economy; twin deficits; volatility; macroeconomic policy;

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References

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  1. Goyal, Ashima & Dash, Shridhar, 2000. "Real and financial sector interaction under liberalisation in an open developing economy," MPRA Paper 23966, University Library of Munich, Germany.
  2. Baxter, Marianne, 1995. "International trade and business cycles," Handbook of International Economics, Elsevier, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 35, pages 1801-1864 Elsevier.
  3. Marianne Baxter, 1995. "International Trade and Business Cycles," NBER Working Papers 5025, National Bureau of Economic Research, Inc.
  4. Maurice Obstfeld & Kenneth Rogoff, 1994. "The Intertemporal Approach to the Current Account," NBER Working Papers 4893, National Bureau of Economic Research, Inc.
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Cited by:
  1. Ashima Goyal, 2013. "Sustaining growth: Interests versus institutions," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2013-001, Indira Gandhi Institute of Development Research, Mumbai, India.

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