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A Decade of Fiscal Reforms in India

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Abstract

The year 1991-92 was one of the toughest years for the Indian economy. All the macroeconomic indicators became adverse. The overall economic growth slumped to a mere 1.1%. The gross fiscal deficit stood at 8 % of the GDP and the revenue deficit on the current account at 3.5 % in 1990-91. Prices shot up to 17 percent, an all time high level. In the external sector, the balance of payment with as little as $1.1 billion foreign reserves or barely enough to meet two weeks’ import bill became precarious. The shortage of foreign exchanges apart from inducing import squeeze for industrial production led the country by June 1991 to face a hard option of defaulting on international commitments such as debt servicing or accepting IMF structural adjustment and stabilisation programme. The new government decided to adopt in June 1991 a programme of macro-economic stabilization to restore viability to fiscal balances and the balance of payments and to contain prices. At the same time it undertook a far reaching programme of structural reforms involving bold initiatives in external trade, exchange rate, industrial policy and so on, all aiming at moving the country to a higher growth trajectory through infusing efficiency and international competitiveness. It also aimed at integrating the Indian economy with the global system and enhancing its robustness through wider access to better technology and benchmarking with the global performers. The reform process was comprehensive. The initial reforms focused on fiscal reforms, policy paradigm shift from physical control regime to the one relying more on market forces and trade related reforms. Subsequently reforms were extended to cover financial sector and to put in place law and regulatory framework compatible with a market system. The full impact of the reform measures edges into view over a long span of time. Nevertheless, a decade since the introduction of the reform process is a long enough period to make visible the results of the reform measures. It is in this background that this paper addresses itself to a vital area of reforms, viz. fiscal reforms. It attempts to evaluate the impact of fiscal reforms on the public finances of the Union and state governments. The paper starts with the outcome of the reform process as reflected in different measures of balances and then proceeds to examine the performance of the process variables that determine the aggregate balances. To form a view of the effectiveness of fiscal reforms, we have examined the performance of some of the important fiscal variables in an inter-temporal context. To be more specific, we have compared the performance of the fiscal variables in the post reform decade with that of the preceding decade.

Suggested Citation

  • Atul Sarma & Manish Gupta, 2002. "A Decade of Fiscal Reforms in India," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0204, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  • Handle: RePEc:ays:ispwps:paper0204
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    Cited by:

    1. Chaitanya, K., 2004. "Indian Economy in the Next Five Years: Key Issues and Challenges, 2005-2009," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 4(4).

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    Keywords

    fiscal reform; India;

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