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

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Making of a Payments Crisis India 1991

Making of a Payments Crisis: India 1991 Ranjit Sau Inflation erodes the real value of a nominal debt, and thereby confers a capital gain upon the debtor. Such capital gain resembles the so-called 'inflation tax', or what Cagan calls 'the tax on cash balances'. This paper recognises the inflation-induced capital gain to the government of India as a positive item in the budget; it is the other side of the Pigou effect. The fiscal deficit thus adjusted is relatively small in size and non-increasing over time. Hence, we conclude that the fiscal deficit and the current payments crisis in India are unrelated, contrary to the official claim.

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