Puzzles in Indian Performance: Deficits Without Disasters

India Development Report 2004-05, Chapter 12, Kirit S. Parikh and R. Radhakrishna, eds., New Delhi: IGIDR and Oxford University Press, 2005

41 Pages Posted: 21 Feb 2005

See all articles by Ashima Goyal

Ashima Goyal

Indira Gandhi Institute of Development Research (IGIDR)

Abstract

The paper explores puzzles in Indian growth performance such as the prolonged period of below potential growth in the late nineties. Uneven behaviour of investment was a major explanation. Risk aversion and adverse expectations prevented investment from rising. Since sufficient domestic and foreign savings were available to compensate for government borrowing, the high fiscal deficit did not crowd out private investment or raise risk and interest rates. A sign of the absence of excess demand was that the fiscal deficit did not lead to a current account deficit. The problem was that, partly because of structural rigidities, monetary-fiscal policy was unable to create the conditions to absorb the foreign savings made available. High volatility in nominal interest and exchange rates raised risk and amplified exogenous shocks. The second factor raising uncertainty was that exposing manufacture to international competition was delayed too long. The smooth fall in Indian nominal interest rates after 2001, and rise in infrastructure spending, succeeded in stimulating higher industrial growth by 2003, and lowering fiscal deficits. Macropolicies can stimulate growth, make it easier to undertake deep reform, and the latter can reinforce growth, allowing it to reach potential.

Keywords: growth puzzles, twin deficits, risk, volatility, monetary policy

JEL Classification: E63, F36, O11, O16, O53

Suggested Citation

Goyal, Ashima, Puzzles in Indian Performance: Deficits Without Disasters. India Development Report 2004-05, Chapter 12, Kirit S. Parikh and R. Radhakrishna, eds., New Delhi: IGIDR and Oxford University Press, 2005, Available at SSRN: https://ssrn.com/abstract=670284

Ashima Goyal (Contact Author)

Indira Gandhi Institute of Development Research (IGIDR) ( email )

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Bombay 400065, Maharashtra
India
+91 22 28400920 (Phone)
+91 22 28402752 (Fax)

HOME PAGE: http://www.igidr.ac.in/~ashima

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