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.

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