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Budgetary Aspects of Stabilization and Strucutral Adjustment in India: The Painful Road to a Sustainable Fiscal-Financial-Monetary Plan

  • W.H. Buiter
  • U Patel

This study updates and extends to the period 88/89-92-93 our earlier analysis of the public finances of India. With the collapse of the communist regimes in the former Soviet Union and Eastern Europe, India found itself, by early 1991, in the unenviable position of having possibly the most over-regulated economic system in the world. In addition, there had been, during the eighties, a break with India's long tradition of fiscal prudence. Following the foreign exchange crisis of 1991, the government implemented a package of restrictive fiscal and monetary measures and a, by Indian standards, ambitious program of structural adjustment and reform of the Union budget, of regulation and licensing, of the domestic financial sector and of international trade and international financial relations. As regards the magnitude of the fiscal corrections that were undertaken, our conclusion is that it was insufficient. Continuations of past and present expenditure and revenue patterns would result in a steady increase in the public debt-GDP ratio and in the discounted value of the public debt. Inflationary financing of the "primary" gap is not a viable option. We calculate that a further permanent increase in the public surplus of about four and a half points of GDP is needed to achieve the modest objective of stabilizing the public debt-GDP ratio. On the reverse side, this necessary increase in the primary surplus is best achieved by expanding the direct and indirect tax bases and improving tax administration, collection and enforcement. On the expenditure side, reductions in the general government wage bill (by reductions in employment rather than by public sector wage cuts), in fertilizer subsidies, in some (but not all) food subsidies and in operating and capital subsidies to public sector enterprises are recommended. For efficiency reasons and to support the proposed expenditure cuts, overwhelming majority of the public sector enterprises should be cut off from the further government subsidies and be privatized or corporatized.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0247.

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Date of creation: Jun 1995
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Handle: RePEc:cep:cepdps:dp0247
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  1. Diebold, Francis X. & Rudebusch, Glenn D., 1991. "On the power of Dickey-Fuller tests against fractional alternatives," Economics Letters, Elsevier, vol. 35(2), pages 155-160, February.
  2. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
  3. Missale, Alessandro & Blanchard, Olivier Jean, 1994. "The Debt Burden and Debt Maturity," American Economic Review, American Economic Association, vol. 84(1), pages 309-19, March.
  4. Peter C.B. Phillips, 1986. "Regression Theory for Near-Integrated Time Series," Cowles Foundation Discussion Papers 781R, Cowles Foundation for Research in Economics, Yale University, revised Jan 1987.
  5. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
  6. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
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