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Indian Public Finance in the 1990s: Challenges and Prospects

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  • Buiter, Willem H.
  • Patel, U

Abstract

This study updates and extends to the period 1988/9--1992/3 our earlier analysis of the public finances of India. The foreign exchange crisis of early 1991 forced the government to recognize the severity of the fiscal crisis it was facing and led to the implementation of a restrictive fiscal and monetary programme. We conclude that the magnitude of the fiscal correction undertaken was insufficient. Further significant increases in the public debt/GDP ratio would be destabilizing and inflationary financing of public sector deficits is not an option. We calculate that a further permanent increase in the public sector primary surplus of about four and a half percentage points of GDP is needed to achieve the modest objective of stabilizing the public debt/GDP ratio. On the revenue side, this 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, 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, the overwhelming majority of the public sector enterprises should be privatized and cut off from further government subsidies.

Suggested Citation

  • Buiter, Willem H. & Patel, U, 1994. "Indian Public Finance in the 1990s: Challenges and Prospects," CEPR Discussion Papers 920, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:920
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    Keywords

    India; Inflation Tax; Public Debt; Public Finance; Solvency;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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