Fiscal Policy in India: Lessons and Priorities*

This paper assesses India’s current fiscal situation, its likely future evolution, and impacts on the economy. We examine possible reforms of macroeconomic policy (including fiscal, monetary and exchange rate policy) and broader institutional reforms that will bear on the macroeconomic situation. We also consider the political feasibility of possible reforms. We examine both medium and longer run scenarios, and fiscal sustainability and adjustment going beyond conventional government budget deficits, to include off-budget liabilities, both actual and contingent. We conclude with our assessment of reforms focused on improving the fisc. * This paper has been prepared for the NIPFP-IMF conference on Fiscal Policy in India, held in New Delhi, January 16-17, 2004. In preparing the paper, we received helpful suggestions from Joshua Aizenman, Peter Heller and Narendra Jadhav. At the conference, we received useful comments from participants, particularly Anne Krueger. We especially acknowledge the comments of our discussant, Rakesh Mohan. Subsequently, we have received useful suggestions from Gustav Ranis, William McCarten, Urjit Patel and Brian Pinto. We are grateful to the IMF, NIPFP, the Economic Growth Center at Yale, and SCID for financial and logistical support, and to Marcy Kaufman for secretarial assistance. None of these organizations or individuals is responsible for the views expressed here. ‡ Department of Economics and Santa Cruz Center for International Economics (SCCIE), University of California, Santa Cruz † Department of Economics and Economic Growth Center, Yale University and Stanford Center for International Development (SCID), Stanford University Fiscal Policy in India, N. Singh and T. N. Srinivasan, February 2004 2 Fiscal Policy in India: Lessons and Priorities Nirvikar Singh T. N. Srinivasan