• Debt relief and growth

Debt relief and growth

This paper examines the links between the public finances and growth in the post-1991 period in India. It particularly focuses on addressing how over the past 25 years, India’s economy has grown at an average real rate of close to 6 percent, and recently accelerating to 9 percent. Yet, by 2005/06, the general government debt-to-GDP ratio was 34 percentage points higher than in the 1980s.

The authors argue that the main factor in the deterioration of government debt dynamics after the mid-1990s was a reform-induced loss in trade, customs and financial repression taxes. Over time, these very factors plus lower entry barriers have contributed to stronger micro foundations for growth by increasing competition and hardening budget constraints for firms and financial sector institutions.

Some of the key findings discussed include:

• the impressive growth acceleration of the past few years, which is now lowering government indebtedness, can be attributed to the lagged effects of these factors, which have taken time to attain a critical mass in view of India’s gradual reforms
• the worsening of the public finances in the 1990s can be attributed to cumulative effects of the tax losses, the negative effects of cuts in capital expenditure that were made to offset tax losses and pullback in private investment, a situation which is now turning around
• insufficient capital expenditures have contributed to the infrastructure gap, which is seen as a constraint, especially for rapid growth in manufacturing.

Overall, the authors point out that ongoing reforms in revenue mobilisation and fiscal adjustment at the state level, which if successfully implemented, will result in a better alignment of public finances with growth by generating further fiscal space for infrastructure and other development spending.

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