India Rising - Faster Growth, Lower Indebtedness

33 Pages Posted: 20 Apr 2016

See all articles by Gaobo Pang

Gaobo Pang

Brian Pinto

Independent

Marina Wes

European Bank for Reconstruction and Development (EBRD)

Date Written: June 1, 2007

Abstract

Over the past 25 years, India's economy grew at an average real rate of close to 6 percent, with growth rates in recent years accelerating to 9 percent. Yet by 2005-06, the general government debt-to-GDP ratio was 34 percentage points higher than in the 1980s. The authors examine the links between public finances and growth in the post-1991 period. They argue that the main factor in the deterioration of government debt dynamics after the mid-1990s was a reform-induced loss in trade, customs, and financial repression taxes. Over time, these very factors plus lower entry barriers have contributed to stronger microfoundations for growth by increasing competition and hardening budget constraints for firms and financial sector institutions. The authors suggest that the impressive growth acceleration of the past few years, which is now lowering government indebtedness, can be attributed to the lagged effects of these factors, which have taken time to attain a critical mass in view of India's gradual reforms. Similarly, the worsening of public finances during the late 1990s can be attributed to the cumulative effects of tax losses, the negative growth effects of cuts in capital expenditure that were made to offset the tax losses, and a pullback in private investment (hence, growth and taxes), a situation which is now turning around. Insufficient capital expenditures have contributed to the infrastructure gap, which is seen as a constraint especially for rapid growth in manufacturing. The authors discuss ongoing reforms in revenue mobilization and fiscal adjustment at the state level, which if successfully implemented, will result in a better alignment of public finances with growth by generating further fiscal space for infrastructure and other development spending.

Keywords: Economic Theory & Research, Banks & Banking Reform, Investment and Investment Climate, Public Sector Economics & Finance, External Debt

Suggested Citation

Pang, Gaobo and Pinto, Brian and Wes, Marina, India Rising - Faster Growth, Lower Indebtedness (June 1, 2007). World Bank Policy Research Working Paper No. 4241, Available at SSRN: https://ssrn.com/abstract=991433

Brian Pinto

Independent ( email )

Marina Wes (Contact Author)

European Bank for Reconstruction and Development (EBRD) ( email )

One Exchange Square
London, EC2A 2EH
United Kingdom

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