Title/Subject:
Global Financial Crises and Fiscal Management in India: What do We Learn?

Synopsis:

The fragility of fiscal responsibility and budget management (FRBM) Act in India can be loosely compared to the Congressional Flexibility in extension of debt limit to avoid treasury defaults. However, the Indian FRBM is linked to GDP and therefore, it is more meaningful compared to US debt limit which controls the end rather than the source of indiscipline. In both cases, however, political will to curb deficit is more important. India suffered humiliations in terms of balance of payments crises in 1991 but since then it has weathered all international crises despite the fact that subsequent periods have seen even larger current account and fiscal deficits. However, passing populist bills, providing tax cuts/rebates, and announcing subsidies without identifying the sources of funding are prevalent. Therefore, in order to bring fiscal discipline it is important to have a transparent and accountable budgetary process with stated financial implications of legislation. The paper delves upon fiscal exuberance and debt management practices in India, the budgetary allocations, changing structure of the deficit, and debt and its sustainability. The external and internal balances highlight its dependence on external borrowing and the vulnerability of the economy. While deficit is increasing, the share of capital formation out of budget is decreasing. Therefore, income multiplier to government expenditure may not be enough to cover the debt liability in long run. The external debt being driven by the private sector, the corporate governance issues have become more critical. The relevance of high foreign exchange reserves has increased further for sustaining growth and avoiding crises situations.

Key Words: India, Budget Deficit, Debt Sustainability, Internal and External Balance

JEL Classification: H0, H6, H7

Remarks

:

Kanhaiya Singh and K.P. Kalirajan

Year

:

2012

Type

:

Working Paper

Sector

:

Public Finace

Number

:

CGDR WP 2012/1

Enquiry

:

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