Budgetary Aspects of Stabilization and Strucutral Adjustment in India: The Painful Road to a Sustainable Fiscal-Financial-Monetary Plan

Willem Buiter and U Patel

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: This study updates and extends to the period 88/89-92-93 our earlier analysis of the public finances of India. With the collapse of the communist regimes in the former Soviet Union and Eastern Europe, India found itself, by early 1991, in the unenviable position of having possibly the most over-regulated economic system in the world. In addition, there had been, during the eighties, a break with India's long tradition of fiscal prudence. Following the foreign exchange crisis of 1991, the government implemented a package of restrictive fiscal and monetary measures and a, by Indian standards, ambitious program of structural adjustment and reform of the Union budget, of regulation and licensing, of the domestic financial sector and of international trade and international financial relations. As regards the magnitude of the fiscal corrections that were undertaken, our conclusion is that it was insufficient. Continuations of past and present expenditure and revenue patterns would result in a steady increase in the public debt-GDP ratio and in the discounted value of the public debt. Inflationary financing of the "primary" gap is not a viable option. We calculate that a further permanent increase in the public surplus of about four and a half points of GDP is needed to achieve the modest objective of stabilizing the public debt-GDP ratio. On the reverse side, this necessary increase in the primary surplus is best achieved by expanding the direct and indirect tax bases and improving tax administration, collection and enforcement. On the expenditure side, reductions in the general government wage bill (by reductions in employment rather than by public sector wage cuts), in fertilizer subsidies, in some (but not all) food subsidies and in operating and capital subsidies to public sector enterprises are recommended. For efficiency reasons and to support the proposed expenditure cuts, overwhelming majority of the public sector enterprises should be cut off from the further government subsidies and be privatized or corporatized.

Date: 1995-06
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Related works:
Working Paper: Budgetary aspects of stabilization and structural adjustment in India: the painful road to a sustainable fiscal-financial-monetary plan (1995)
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