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Fiscal deficits and government debt in India: Implications for growth and stabilisation

Author

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  • Rangarajan, C.

    () (National Institute of Public Finance and Policy)

  • Srivastava, D.K.

    () (National Institute of Public Finance and Policy)

Abstract

This paper examines the long term profile of fiscal deficit and debt relative to GDP in India, with a view to analysing debt-deficit sustainability issues along with the considerations relevant for determining suitable medium and short-term fiscal policy stance. The impact of debt and fiscal deficit on growth and interest rates that arises from their effect on saving and investment are critical in any examination of sustainability of debt and deficit. It is argued that large structural primary deficits and interest payments relative to GDP have had an adverse effect on growth in recent years. The Fiscal Responsibility and Budget management Act (FRBMA) of the central government has certain positive features. While the fiscal deficit target has been defined, it should be considered in conjunction with a target debt-GDP ratio. Further, the central FRBMA should be supplemented by state level fiscal responsibility legislations and an effective hard budget constraint on subnational borrowing. There is a clear need to bring down the combined debt-GDP ratio from its current level, which is in excess of 80 percent of GDP. The process of adjustment can be considered in two phases: adjustment phase and stabilisation phase. In the adjustment phase, fiscal deficit should be reduced in each successive year until revenue deficit, and correspondingly, government dissaving, is eliminated. In the second phase, fiscal deficit could be stabilised at 6 percent of GDP. The debt-GDP ratio would eventually stabilise at 56 percent. In this process, the ratio of interest payments to revenue receipts will fall, enabling a progressively larger amount of primary revenue expenditure to be incurred on the social sectors.

Suggested Citation

  • Rangarajan, C. & Srivastava, D.K., 2005. "Fiscal deficits and government debt in India: Implications for growth and stabilisation," Working Papers 05/35, National Institute of Public Finance and Policy.
  • Handle: RePEc:npf:wpaper:05/35
    Note: Working Paper 35, 2005
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    File URL: http://www.nipfp.org.in/working_paper/wp05_nipfp_035.pdf
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    Cited by:

    1. Das, Panchanan, 2016. "Debt Dynamics, Fiscal Deficit, and Stability in Government Borrowing in India: A Dynamic Panel Analysis," ADBI Working Papers 557, Asian Development Bank Institute.
    2. Antra Bhatt & Claudio Sardoni, 2016. "Public Expenditure and Growth: The Indian Case," Working Papers 7/16, Sapienza University of Rome, DISS.
    3. M. Mahamallik & P. Sahu & S. Mahapatra, 2014. "The Paradox of Fiscal Imbalances in India," Working Papers wp969, Dipartimento Scienze Economiche, Universita' di Bologna.
    4. Debi Prasad Bal & Badri Narayan Rath, 2016. "Is Public Debt a Burden for India?," Economic Papers, The Economic Society of Australia, vol. 35(2), pages 184-201, June.
    5. Nimai Das, 2015. "Subnational level fiscal health in India: stability and sustainability implications," Economic Change and Restructuring, Springer, vol. 48(1), pages 71-91, February.
    6. Narayan, Laxmi, 2015. "Some Aspects of Haryana State Finances –An Exploratory Analysis," MPRA Paper 64697, University Library of Munich, Germany, revised Apr 2015.
    7. Hakhu, Antra Bhatt, 2015. "Productive Public Expenditure and Debt Dynamics: An Error Correction Representation using Indian Data," Working Papers 15/149, National Institute of Public Finance and Policy.
    8. Pradhan, Krishanu, 2014. "Is India's public debt sustainable?," Working Papers 311, Institute for Social and Economic Change, Bangalore.
    9. C. Rangarajan & D. K. Srivastava, 2008. "Reforming India’S Fiscal Transfer System: Resolving Vertical And Horizontal Imbalances," Working Papers 2008-031, Madras School of Economics,Chennai,India.
    10. Pradhan, Krishanu, 2014. "Fiscal sustainability of national food security act, 2013 in India," Working Papers 332, Institute for Social and Economic Change, Bangalore.

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    Keywords

    Fiscal deficit ; Economic growth;

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