Fiscal Policy Issues for India after the Global Financial Crisis (2008-2010)

The need for fiscal consolidation and sustainability is one of the key macroeconomic issues confronting Indian economy. This paper attempts to understand India's current fiscal situation, its likely future development, and its impact on the economy in the context of a weak global recovery from the current crisis. The impact of the global crisis has been transmitted to the Indian economy through three distinct channels, namely: the financial sector, exports, and exchange rates. The other significant channel of impact is the slump in business and consumer confidence leading to decrease in investment and consumption demand. The Indian government, to boost the demand, has announced several stimulus packages. However, there is not much room for further fiscal policy action as the consolidated fiscal deficit of the central and state governments in 2009-2010 is already about 11% of the gross domestic product (GDP). Any further increase in the fiscal deficit to GDP ratio could invite a sharp downgrading of India's credit rating and a loss of business confidence. The paper reviews the existing theories on the relationship between fiscal deficit and growth. It also analyzes the past trends and policy measures to understand the possible implications for economic recovery and long run growth in the Indian context. It also provides a long-term forecast of the fiscal deficit and public debt burden based on the past trends. Finally, the paper suggests a set of policy measures to get the Indian economy back on the path of sustained rapid and inclusive growth

Household Savings Decision and Income Uncertainty

This paper empirically investigates the effects of changes in the interest rate as well as transitory income uncertainty on households' consumption-savings decision. Applying a structural demand model to German survey data, we estimate the uncompensated interest rate elasticity for savings, in line with the literature, to around zero. Accordingly, any policy-induced variation of net returns to savings is expected to have no significant effects on the level of savings. Moreover, we find significant effects of precautionary savings on the consumption-savings decision. As a result of a doubling of transitory income uncertainty, an average household increases savings by 4:4%. These effects vary by household composition and social status