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India : why fiscal adjustment now

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  • Pinto, Brian
  • Zahir, Farah
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    Abstract

    India's growth performance has been impressive over the last two decades. But its sustainability has been in question, first with the 1991 fiscal-balance of payments crisis (BoP), and then again after 1997/98, when fiscal deficits returned to the 10 percent of GDP range and government debt grew. This paper analyzes the deterioration in India's public finances and presents evidence suggesting that, in the absence of a fiscal adjustment, low inflation and high reserves may have been pursued at the expense of long-run growth and poverty reduction. Resolving this inflation-external vulnerability-growth policy trilemma requires fiscal adjustment. In making its case, the paper shows, first, that fiscal fundamentals have weakened after 1997/98 even when compared with the pre-1991 crisis period. This has continued in spite of the recent record lows in interest rates. Second, the fiscal stance is not conducive to long-run growth and poverty reduction because capital spending has been cut to accommodate higher interest payments and other current spending, with expenditures on the social sectors stagnating. Third, without a fiscal adjustment, the debt burden is likely to reach unmanageable levels by the end of the Tenth Plan period. In contrast, a phased adjustment beginning now and focusing on a relatively small set of reforms is likely to improve debt dynamics substantially over the same horizon, while also promoting faster growth and poverty reduction.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3230.

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    Date of creation: 01 Mar 2004
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    Handle: RePEc:wbk:wbrwps:3230

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    Keywords: Banks&Banking Reform; Payment Systems&Infrastructure; Public Sector Economics&Finance; Economic Theory&Research; Environmental Economics&Policies; Economic Theory&Research; Banks&Banking Reform; Economic Stabilization; Public Sector Economics&Finance; Environmental Economics&Policies;

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    1. Biaggio Bossone & Sandeep Mahajan & Farah Zahir, 2003. "Financial Infrastructure, Group Interests, and Capital Accumulation," IMF Working Papers 03/24, International Monetary Fund.
    2. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    3. World Bank, 2003. "India : Sustaining Reform, Reducing Poverty," World Bank Publications, The World Bank, number 15046, October.
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    6. Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
    7. Flood, Robert P. & Jeanne, Olivier, 2005. "An interest rate defense of a fixed exchange rate?," Journal of International Economics, Elsevier, vol. 66(2), pages 471-484, July.
    8. Roberto Chang & Andres Velasco, 1998. "The Asian Liquidity Crisis," NBER Working Papers 6796, National Bureau of Economic Research, Inc.
    9. Umali-Deininger, Dina L. & Deininger, Klaus W., 2001. "Towards greater food security for India's poor: balancing government intervention and private competition," Agricultural Economics, Blackwell, vol. 25(2-3), pages 321-335, September.
    10. Aizenman, Joshua, 2008. "On the hidden links between financial and trade opening," Journal of International Money and Finance, Elsevier, vol. 27(3), pages 372-386, April.
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    12. World Bank, 2003. "India : Sustaining Reform, Reducing Poverty," World Bank Other Operational Studies 14617, The World Bank.
    13. Maurice Obstfeld & Alan M. Taylor, 1998. "The Great Depression as a Watershed: International Capital Mobility over the Long Run," NBER Chapters, in: The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, pages 353-402 National Bureau of Economic Research, Inc.
    14. Byrne,Joseph P. & Davis,E. Philip, 2003. "Financial Structure," Cambridge Books, Cambridge University Press, number 9780521831802, October.
    15. Renu Kohli & Kenneth Kletzer, 2001. "Financial Repression and Exchange Rate Management in Developing Countries," IMF Working Papers 01/103, International Monetary Fund.
    16. repec:rus:hseeco:123922 is not listed on IDEAS
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    Cited by:
    1. Gill, Indermit & Pinto, Brian, 2005. "Public debt in developing countries : has the market-based model worked?," Policy Research Working Paper Series 3674, The World Bank.

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