Public Expenditure and Emerging Fiscal Policy Scenario in India
38 Pages Posted: 25 Mar 2012
Date Written: March 31, 2005
Pattnaik, Bose, Bhattacharyya and Chander analyse the role of public expenditure in India as a key fiscal policy instrument to achieve the goals of growth, equity and stability and, at the same time, to ensure the sustainability of public finances. The paper documents the development of fiscal policy and, in particular, of public expenditure in India since the beginning of the Eighties. After a period of mounting fiscal deficits (from 7.5 percent of GDP in 1980-81 to 9.4 in 1990-91), mainly driven by an increase in interest payments, in the early Nineties the government implemented a strategy of fiscal consolidation, which primarily focused on expenditure compression. In particular, the decline in capital outlays (from 3.0 percent in 1986-87 to 1.0 in 1996-97) enabled a reduction in fiscal deficit to 6.4 percent of GDP in 1996-97. In view of the evidence of a stable long-run relationship between public sector expenditure and national income in India, the Authors argue that such a trend needs to be reversed in the future and conclude that the bulk of fiscal adjustments has to rely on a greater mobilization of revenue receipts rather than on curtailing developmental expenditure.
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