ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Fiscal Deficits and Government Debt

This paper examines the long-term profile of the fiscal deficit and debt relative to GDP in India, with a view to analysing debt-deficit sustainability issues, along with relevant considerations to determine a suitable medium- and short-term fiscal policy stance. It is argued that large structural primary deficits and interest payments relative to GDP have had an adverse effect on growth in recent years. There is a clear need to bring down the combined debt-GDP ratio from its current level, which is in excess of 80 per cent of GDP. The process of adjustment can be considered in two phases: adjustment and stabilisation. In the adjustment phase, the fiscal deficit should be reduced in each successive year until the revenue deficit, and correspondingly, government dissaving, is eliminated. In the second phase, the fiscal deficit could be stabilised at 6 per cent of GDP and the debt-GDP ratio would eventually stabilise at 56 per cent.

Fiscal Transfers in Australia

This paper examines the working of Australia's fiscal transfer system in the context of its long-term evolution, paying particular attention to salient changes that have occurred since the introduction of a comprehensive Goods and Services Tax (GST). The GST has served to increase the vertical imbalance in the system, which was high even prior to this change, by placing more revenue resources with the Commonwealth Government in Australia. In spite of a high degree of expenditure centralisation, considerable emphasis is placed in Australia on achieving horizontal fiscal equalisation through an elaborate mechanism of equalisation transfers, which looks into both revenue and expenditure sides of the state budgets and calculates revenue and expenditure 'disabilities' that account for departures from a pure equal per capita distribution of the shareable amounts. This paper looks at the equity and efficiency implications of the Australian equalisation transfers and considers its relevance for the Indian system, which has many comparable features. Apart from the need for making equalising features of the Indian transfer system more transparent, there is need for emphasising some cost disabilities, particularly those that are structural and exogenous in nature.

Issues before Twelfth Finance Commission

The setting up of the Twelfth Finance Commission has once again drawn attention to the core issues of determining tax devolution and grants. It is not as if the issues are entirely new, but the problem of balancing resources against responsibilities is qualitatively different now when governments at all levels are nursing large and rising revenue deficits. With current trends indicating a continuing deterioration, how are these core issues to be addressed? The National Institute of Public Finance and Policy has been organising seminars on the major issues before the successive Finance Commissions for several years now in collaboration with the Finance Commissions. The papers presented in the seminars have so far been published by the Institute itself in the form of edited volumes. A departure from this practice is now being made by bringing out selected papers, originally presented in the seminar on 'Issues before the Twelfth Finance Commission' held at New Delhi on September 29-30, 2003.

Fiscal Transfers in Canada

The Canadian system of fiscal transfers, developed over a long period of time, has two central features: equalisation grants, which are constitutionally guaranteed and the Canadian Health and Social Service Transfers (CHST). This paper examines the relevance and applicability of the Canadian system of inter-governmental transfers in the Indian case. Equalisation grants are meant to ensure that provinces have sufficient revenues to provide reasonably comparable levels of services at reasonably comparable levels of taxation. An elaborate 'representative tax system' approach using individual revenue bases is used in Canada for determining the equalisation grants, although there has recently been a debate to use a more macro approach. The source-by-source approach is less practical in the Indian case for want of comparable and reliable information required for applying the method. A more practical alternative is the macro approach, which is adopted in India, but better indicators of fiscal capacity than those based on GSDP need to be used. In addition, the concept of ensuring that resources are available for maintaining the per capita expenditure of select basic services at certain levels among states, as attempted in Canada through the CHST transfers, is worth exploring.

Dynamics of Debt Accumulation in India

Accumulation of debt can be seen as the resultant of the balance between cumulated primary deficits and the cumulated weighted excess of growth over interest rate. Decomposing the change in the central governmentâ??s liabilities relative to GDP since 1951-52, it is seen that but for three recent years, the accretion to debt relative to GDP was due to the cumulated primary deficits. A significant part of the effect of the cumulated primary deficits could be absorbed in the sixties, seventies, and the nineties due to the excess of growth over interest rate. However, there were large unabsorbed parts in the fifties and the eighties. The cushion provided by the excess of growth over interest rate may not continue to be available for long. For three years, viz, 2000-01 to 2002-03, the interest rate exceeded the growth rate. This, together with the continuing primary deficits though at a reduced level, led to acceleration in the increase in the debt-GDP ratio in recent years. For stabilisation of the debt-GDP ratio at current or reduced levels, focus on primary balance becomes necessary.

National Statistical Commission: An Overview of the Recommendations

The loss of credibility of official statistics, especially in the 1990s, prompted the appointment of the National Statistical Commission with wide-ranging terms of reference. After analysing the deficiencies of the Indian statistical system in terms of its administrative and technical requirements, the commission has made several recommendations to revamp the statistical system. This article presents the approach taken by the commission and some of the salient recommendations.

Some Critical Issues in Monetary Policy

There are continuing debates on several issues connected with monetary policy. Questions have been raised on the objectives, instrumentalities and impact of monetary policy. Monetary management in the 1980s and more particularly in the 1990s in India offers interesting insights on the role of monetary policy as an instrument of economic policy. This paper draws some important lessons from this experience.

Capital Flows: Another Look

In the aftermath of the east Asian crisis, the need to reassess and understand the role of capital flows has become imperative. In this context two sets of questions arise. The first set centres on whether some forms of capit al flows are preferable to others. This issue has to be addressed from the angles of volatility and impact on capital formation and growth. The second set of questions relates to the extent and forms of controls that can be imposed on capital flows. Opening up of capital account need not preclude the imposition of moderate controls, either price based or regulatory, on capital flows. Controls should be selective, designed to achieve the specific objective of containing speculative flows. The Asian crisis is not an argument against capital account liberalisation. Capital account liberalisation is not a discrete event. It is a process and should be done in stages.

Analytics of the Asian Crisis

The Asian Financial Crisis: Causes, Contagion and Consequences edited by Pierre-Richard Agenor, Marcus Miller, David Vines and Axel Weber; Cambridge University Press, 1999; pp 417.

State, Market and the Economy

While recognising that state and market have separate but interconnected roles to play, the emerging view is that the market must be allowed to work wherever it can function efficiently and the state must step in wherever the market does not succeed. In this paper an attempt is made to provide the broad contours of this debate, derive lessons from international experience and provide a framework for determining the appropriate mix.

Role of Monetary Policy

What should be the objectives of monetary policy ? Does the objective of price stability conflict with the goal of achieving faster economic growth? Can monetary policy by itself ensure price stability? What should be the intermediate target of monetary policy? What are the respective roles of direct and indirect instruments of monetary control?

Money, Output and Prices-A Macro Econometric Model

Money, Output and Prices A Macro Econometric Model C Rangarajan R R Arif This paper presents an econometric model of the Indian economy which emphasises the interrelationships among money, output and prices. The main linkages in the model are as follows: The stock of money varies endogenously through the feedback from reserve money which changes to accommodate fiscal deficits. The price level is determined by money supply and output. The government budget is affected by the price level and output. The latter is influenced, among other factors, by changes in real money supply acting as a proxy for real credit. The empirical results show that the price effects of an increase in money supply are stronger than the output effects. Since govern- ment revenue collections do not keep pace with government expenditures as nominal incomes rise, the resource gap widens during a period of continued price increases. The policy simulations show that while a substantial increase in government capital expenditures increases output, its impact on output and prices also depends on the extent of the resource gap met by borrowing from the Reserve Bank. As the proportion of the resource gap met by borrowing from the Reserve Bank increases, the trade-off between output and prices worsens sharply Introduction THE role of money and monetary policy in the determination of real output and price level is increasingly receiving a( tent ion. Empirical research on the factors influencing economic growth includes several attempts to develop econometric models of the Indian economy. Beginning with simple models, empirical research has made considerable progress in the study of the structure and functioning of various sectors of the economy. In recent years, a greater emphasis on policy issues is also' observed. The models differ in their approach and focus. In some models the emphasis is on production and supply while in others it is on demand factors. Some studies pay special attention to the government sector; some recent attempts focus on the interrelationship among money, output and prices and the identification of the sources of growth and inflation. Some of the recent studies in this area are indicated in the list of references at the end of the paper.

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