India's Public Finances: Excessive Budget Deficits, a Government-Abused Financial System and Fiscal Rules
Capital formation is a key driver of the growth of potential output. With continuing widespread capital controls and persistently small inward FDI the volume of capital formation in India is constrained by domestic saving. The national saving rate in India (the sum of the saving rates of households, enterprises and the state) is depressed by the continuing large public sector deficits (and much below the near 40% of GDP saving rates achieved by China). Even this saving rate should be able to support a higher growth rate than has been achieved thus far. The reason it does not is that the intermediation of this saving into domestic capital formation is inefficient. Since the middle of the 1990s, India's public debt has risen steadily as a share of GDP, but remains below the levels achieved at the time of the 1991 currency crisis. The composition of this debt is, however, significantly different from that in 1991: external public debt is modest and international gold and foreign exchange reserves stand at historically high levels. The domestic debt is rupee-denominated. For all these reasons, government solvency may not be a pressing issue at this stage. Globally, risk-free rates at all maturities and all imaginable credit risk spreads are extraordinarily and unsustainably low. Continuation of the pattern of recent years - a steady increase in the debt-GDP ratio - will sooner or later raise the public debt to unsustainable levels. The fiscal rules adopted by the Indian Central Government under the Fiscal Responsibility and Budget Management Act do not address the key distortions imposed by the authorities on the private sector through financial repression, misguided regulations and inefficient ownership and incentive structures. Nor do they address the underlying fiscal sustainability problem faced by the Indian state. In addition, they create a mechanism for macroeconomic volatility-enhancing, pro-cyclical fiscal policy.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
|Date of creation:||Feb 2006|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Singh, Nirvikar & Srinivasan, T. N., 2004.
"Foreign Capital, Inflation, Sterilization, Crowding-Out and Growth: Some Illustrative Models,"
Santa Cruz Department of Economics, Working Paper Series
qt4c4363xp, Department of Economics, UC Santa Cruz.
- Singh, Nirvikar & Srinivasan, T. N., 2004. "Foreign Capital, Inflation, Sterilization, Crowding-Out and Growth: Some Illustrative Models," Santa Cruz Department of Economics, Working Paper Series qt1m09m3kf, Department of Economics, UC Santa Cruz.
- Singh, Nirvikar & Srinivasan, T. N., 2004. "Foreign Capital, Inflation, Sterilization, Crowding-Out and Growth: Some Illustrative Models," Santa Cruz Center for International Economics, Working Paper Series qt1m09m3kf, Center for International Economics, UC Santa Cruz.
- Ajay Shah & Ila Patnaik, 2005.
"India's Experience with Capital Flows: The Elusive Quest for a Sustainable Current Account Deficit,"
NBER Working Papers
11387, National Bureau of Economic Research, Inc.
- Ajay Shah & Ila Patnaik, 2007. "India's Experience with Capital Flows: The Elusive Quest for a Sustainable Current Account Deficit," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 609-644 National Bureau of Economic Research, Inc.
- Phillips, P.C.B., 1986.
"Testing for a Unit Root in Time Series Regression,"
Cahiers de recherche
8633, Universite de Montreal, Departement de sciences economiques.
- repec:ind:nipfwp:35 is not listed on IDEAS
- 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.
- Abhijit V. Banerjee & Shawn Cole & Esther Duflo, 2004. "Banking Reform in India," India Policy Forum, Global Economy and Development Program, The Brookings Institution, vol. 1(1), pages 277-332.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:5502. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.