India: Why Fiscal Adjustment Now
32 Pages Posted: 20 Apr 2016
Date Written: March 2004
India's growth performance has been impressive over the past two decades. But its sustainability has been in question, first with the 1991 fiscal balance-of-payments crisis, and then again after 1997-98, when fiscal deficits returned to the 10 percent of GDP range and government debt grew further. Pinto and Zahir analyze the deterioration in India's public finances and present evidence suggesting that, in the absence of a fiscal adjustment, low inflation and high reserves may have been pursued at the expense of long-run growth and poverty reduction. Resolving this inflation-external vulnerability-growth policy trilemma requires fiscal adjustment. In making their case, the authors show, first, that fiscal fundamentals have weakened after 1997-98 even when compared with the pre-1991 crisis period. This has continued in spite of the recent record lows in interest rates. Second, the fiscal stance is not conducive to long-run growth and poverty reduction because capital spending has been cut to accommodate higher interest payments and other current spending, with expenditures on the social sectors stagnating. Third, without a fiscal adjustment, the debt burden is likely to reach unmanageable levels by the end of the Tenth Plan period. In contrast, a phased adjustment beginning now and focusing on a relatively small set of reforms is likely to improve debt dynamics substantially over the same horizon, while also promoting faster growth and poverty reduction.
This paper - a product of the Poverty Reduction and Economic Management Unit, South Asia Region - is based on the macro-fiscal chapter of India: Sustaining Reform, Reducing Poverty, a World Bank Development Policy Review released in July 2003.
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