Article thumbnail

Fiscal deficits and government debt in India: Implications for growth and stabilisation.

By C. Rangarajan and D.K. Srivastava


This paper examines the long term profile of fiscal deficit and debt relative to GDP in India, with a view to analysing debt-deficit sustainability issues along with the considerations relevant for determining suitable medium and short-term fiscal policy stance. The impact of debt and fiscal deficit on growth and interest rates that arises from their effect on saving and investment are critical in any examination of sustainability of debt and deficit. It is argued that large structural primary deficits and interest payments relative to GDP have had an adverse effect on growth in recent years. The Fiscal Responsibility and Budget management Act (FRBMA) of the central government has certain positive features. While the fiscal deficit target has been defined, it should be considered in conjunction with a target debt-GDP ratio. Further, the central FRBMA should be supplemented by state level fiscal responsibility legislations and an effective hard budget constraint on subnational borrowing. There is a clear need to bring down the combined debt-GDP ratio from its current level, which is in excess of 80 percent of GDP. The process of adjustment can be considered in two phases: adjustment phase and stabilisation phase. In the adjustment phase, fiscal deficit should be reduced in each successive year until revenue deficit, and correspondingly, government dissaving, is eliminated. In the second phase, fiscal deficit could be stabilised at 6 percent of GDP. The debt-GDP ratio would eventually stabilise at 56 percent. In this process, the ratio of interest payments to revenue receipts will fall, enabling a progressively larger amount of primary revenue expenditure to be incurred on the social sectors.Fiscal deficit ; Economic growth

OAI identifier:

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.

Suggested articles


  1. (1989). A Neoclassical Perspective on Budget Deficits”,
  2. (2004). A Study of Debt Sustainability at the State Level in India”, Reserve Bank of India.
  3. (1987). and C.Frenze. “Federal Tax Increases and the Budget Deficit, 1947-86: Some Empirical Evidence”, Joint Economic Committee Minority Staff Paper
  4. and Dichotomization of Long- and Short- Run Relations of Cointegrated Vector Autoregressive Models,
  5. (1994). Anupam Basu and Narendra Jadhav. “Dynamics of Interaction between Government Deficit and Domestic Debt
  6. (1995). Applying Generational Accounting to Developing Countries”,
  7. (1974). Are Government Bonds Net Wealth?”,
  8. (1989). Assessing Dynamic Efficiency: Theory and Evidence”,
  9. (2000). Bond Financing and Debt Stability: Theoretical Issues and Empirical Analysis for India”,
  10. (1989). Budget Deficits and National Saving: Are Politicians Exogenous”,
  11. (1989). Budget Deficits: Rhetoric and Reality”,
  12. (1981). Business Cycles: An Empirical Investigation”, Discussion Paper No.
  13. (1997). Cointegration and Dynamic Simultaneous Equation Model,”
  14. (2005). Deficit: Sustainability, Solvency, and Optimally”
  15. (1992). Deficits and Inflation: An Application to the Public Finances of India”,
  16. (1996). Do Balanced Budget Rules Work?
  17. Do Purchasing Power Parity and Uncovered Interest Rate Parity Hold in the Long Run? An Example of Likelihood Inference in Multivariate Time Series Model”,
  18. (2004). Does Higher Fiscal Deficit Lead to Rise in Interest Rates? An Empirical Investigation”, Economic and Political Weekly,
  19. (2003). Dynamics of Debt Accumulation
  20. Estimation and Hypothesis Testing of Cointegrated Vectors in Gaussian Vector Autoregressive Models,”
  21. (1996). Estimation of Structural Deficits
  22. (2005)., “Is India’s Central Debt Sustainable? Revisiting an Old Debate”, Economic and Political Weekly,
  23. (2003). Evaluating Kelkar Task Force Report”, Economic and Political Weekly,
  24. (2002). Fiscal Deficit and Rate of Interest: An Econometric Analysis of the Deregulated Financial Regime”,
  25. Fiscal Policy”,
  26. (1989). Forecasting, Structural Time Series Models and the Kalman Filter. Cambridge:
  27. (1985). Guide to Public Sector Deficit and Debt” Economic Policy,
  28. (1997). How Serious is the Pact on Stability and Growth?”,
  29. Identification of the Long-run and Short Run Structure: An Application to the ISLM
  30. (2001). India’s Fiscal Deficits and Their Sustainability in Perspective” Paper presented at World Bank-NIPFP seminar on Fiscal Policies for Growth,
  31. (2001). Nature of the Fiscal Crisis in Indian Federation and Calibrating Fiscal Policy”, Money and Finance,
  32. (2000). On Correcting Fiscal Imbalances in the Indian Economy: Some Perspectives”, Money and Finance,
  33. (2001). On Fiscal Deficits and Real Interest Rates” Economic and Political Weekly,
  34. (1976). Perceived Wealth in Bonds and Social Security:
  35. (1980). Public Investment, Crowing Out, and Growth: A Dynamic Model Applied to India and Korea”,
  36. (1990). Ratha and Atul Sarma. “Complementarily Between Public and Private Investment in India”,
  37. (1976). Reply to Feldstein and Buchanan”,
  38. (2002). Report on Currency and Finance,
  39. (1989). Ricardian Approach to Budget Deficit”,
  40. (1986). Ricardian Consumers with Keynesian Propensities”,
  41. (1987). Spending, Interest Rates, Prices, and Budget Deficits in the United Kingdom,
  42. (1998). Structural Budget Deficits and Sustainability of Fiscal Positions in the European Union”, Working Paper No. 26, Oesterreichische National Bank
  43. (2000). Sustainability of Public Domestic Debt in India”,
  44. Symposium on the Budget Deficit”,
  45. (1986). Tax and Spend, or Spend and Tax”,
  46. (2001). The Behaviour of Private Investment”,
  47. (1987). The Burden of Domestic Public Debt in India,
  48. (1994). The Cyclical Adjustment of Budget Balances,
  49. (1979). the Determination of the Public Debt,”
  50. (2002). The Economic Effects of Long Term Fiscal Discipline,” Urban-Brookings Tax Policy Center Discussion Paper,
  51. (1996). The Meaning and Significance of the Fiscal Deficit”,
  52. (1990). The Measurement and Interpretation of Structural Budget Balances”,
  53. The Sustainability of Fiscal Deficit in the European Union”,
  54. (1988). Thoughts on the Role of Fiscal Policy
  55. Transfers and Savings”,