India : Why Fiscal Adjustment Now

India : Why Fiscal Adjustment Now

India's growth performance has been impressive over the last two decades. But its sustainability has been in question, first with the 1991 fiscal-balance of payments crisis (BoP), and then again after 1997/98, when fiscal deficits returned to...

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Bibliographic Details
Main Authors:	Pinto, Brian, Zahir, Farah
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank: Washington, DC 2013
Subjects:	ADMINISTRATIVE COSTS AGRICULTURE BAILOUT COSTS BALANCE OF PAYMENTS BALANCE SHEET BALANCE SHEETS BANK DEPOSITS BANKS BENCHMARK BONDS BORROWING CAPITAL EXPENDITURES CAPITAL FLOWS CAPITAL GAIN CENTRAL BANK CIVIL SERVICE COUNTRY COMPARISONS DEBT DEFAULT RISK DEMAND DEPOSITS DEPOSIT INSURANCE DEVALUATION DOMESTIC BORROWING DOMESTIC INFLATION ECONOMIC GROWTH ELECTRICITY EMPLOYMENT EQUILIBRIUM EVERGREENING EXCHANGE RATE EXPORTS EXTERNAL SHOCKS FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIATION FINANCIAL SECTOR FISCAL ADJUSTMENT FISCAL DEFICIT FISCAL DEFICITS FISCAL POLICY FISCAL REFORM FISCAL RESTRAINT FISCAL YEAR FOREIGN BANKS FOREIGN EXCHANGE FOREIGN EXCHANGE RESERVES GAMBLING GDP GOVERNMENT BONDS GOVERNMENT BUDGET GOVERNMENT DEBT GOVERNMENT GUARANTEES GOVERNMENT SECURITIES GOVERNMENT SPENDING GROSS DOMESTIC PRODUCT GROWTH POLICY GROWTH RATE GROWTH RATES IMPORTS INFLATION INFLATION RATES INSURANCE INTEREST RATES LENDING RATES LIQUIDITY LIQUIDITY RATIO LOW INTEREST RATES M3 MACROECONOMIC POLICY MACROECONOMIC STABILITY MUTUAL FUND NATIONALIZED BANKS PENSION LIABILITIES PENSIONS PER CAPITA INCOME POVERTY ALLEVIATION PRESENT VALUE PRIVATE BANKS PRIVATE SECTOR PRIVATIZATION PROVISIONS PUBLIC DEBT PUBLIC DEBT MANAGEMENT PUBLIC ENTERPRISES PUBLIC FINANCE PUBLIC OWNERSHIP PUBLIC SAVINGS PUBLIC SECTOR PUBLIC SECTOR DEBT PUBLIC SPENDING REAL EXCHANGE RATE REAL EXCHANGE RATES REAL GDP REAL INTEREST RATE REAL INTEREST RATES REAL SECTOR REGIONAL RURAL BANKS RESERVE BANK OF INDIA RETURN ON INVESTMENT REVENUE MOBILIZATION REVENUE SOURCES SAVINGS RATES TAX TAX REFORM TAX REVENUE TIME DEPOSITS TOTAL REVENUE TRANSPORT USER CHARGES FISCAL BALANCE POVERTY MITIGATION PRIVATE INVESTMENTS FISCAL REFORMS FISCAL SUSTAINABILITY
Online Access:	http://documents.worldbank.org/curated/en/2004/03/3092272/india-fiscal-adjustment-now http://hdl.handle.net/10986/14441

Description
Summary:	India's growth performance has been impressive over the last two decades. But its sustainability has been in question, first with the 1991 fiscal-balance of payments crisis (BoP), and then again after 1997/98, when fiscal deficits returned to the 10 percent of GDP range and government debt grew. This paper analyzes the deterioration in India's public finances and presents 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 its case, the paper shows, 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.

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