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The Challenge of Fiscal Adjustment in a Democracy; The Case of India

  • Ricardo Hausmann
  • Catriona Purfield

India's fiscal problem has deep roots in its federal fiscal system, where multiple players find it difficult to coordinate adjustment. The size and closed nature of the Indian economy, aided by its deep domestic capital market and large captive pool of domestic savings, has disguised the cost of fiscal laxity and complicated the building of a consensus on reform. The new fiscal responsibility act establishes a new rules-based system to overcome this coordination failure. To strengthen the framework, we recommend an autonomous scorekeeper and the extension of similar rules to the state governments as part of a comprehensive reform of the federal system.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/168.

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Length: 30
Date of creation: 01 Sep 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/168
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  1. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
  2. Ernesto Stein & Ernesto Talvi & Alejandro Grisanti, 1998. "Institutional Arrangements and Fiscal Performance: The Latin American Experience," NBER Working Papers 6358, National Bureau of Economic Research, Inc.
  3. Alesina, Alberto & Hausmann, Ricardo & Hommes, Rudolf & Stein, Ernesto, 1999. "Budget institutions and fiscal performance in Latin America," Journal of Development Economics, Elsevier, vol. 59(2), pages 253-273, August.
  4. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077 Elsevier.
  5. International Monetary Fund, 1996. "Budget Processes and Commitment to Fiscal Discipline," IMF Working Papers 96/78, International Monetary Fund.
  6. Alberto Alesina & Roberto Perotti, 1995. "The Political Economy of Budget Deficits," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 1-31, March.
  7. Ebel, Robert D. & Yilmaz, Serdar, 2002. "On the measurement and impact of fiscal decentralization," Policy Research Working Paper Series 2809, The World Bank.
  8. James M. Poterba, 1993. "State Responses to Fiscal Crisis: The Effects of Budgetary Institutionsand Politics," NBER Working Papers 4375, National Bureau of Economic Research, Inc.
  9. Catriona Purfield, 2004. "The Decentralization Dilemma in India," IMF Working Papers 04/32, International Monetary Fund.
  10. Ila Patnaik & Ajay Shah, 2005. "Interest-rate risk in the Indian banking system," Risk and Insurance 0501003, EconWPA.
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