India rising - faster growth, lower indebtedness

Over the past 25 years, India's economy grew at an average real rate of close to 6 percent, with growth rates in recent years 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 examine the links between public finances and growth in the post-1991 period. They 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 microfoundations for growth by increasing competition and hardening budget constraints for firms and financial sector institutions. The authors suggest that 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. Similarly, the worsening of public finances during the late 1990s can be attributed to the cumulative effects of tax losses, the negative growth effects of cuts in capital expenditure that were made to offset the tax losses, and a pullback in private investment (hence, growth and taxes), 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. The authors discuss ongoing reforms in revenue mobilization 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.Economic Theory&Research,Banks&Banking Reform,Investment and Investment Climate,Public Sector Economics&Finance,External Debt

Expenditure implications of India's state-level fiscal crisis

Indias states have significant developmental expenditure responsibilities. While the fiscal crisis which engulfed Indias states in the late nineties led to higher deficits and debt levels, it was also associated with a rapid increase in expenditure levels, and it might be thought that this would have increased the development effectiveness of the state governments. However, a closer look at the data reveals that this is not the case. The main positive fiscal development in the post 1996/97 period is a pick up in real growth in government capital expenditure. In other respects, the fiscal crisis weakened the developmental and poverty impact of state governments especially in the poor states. Real growth of expenditure in health and education slowed, in some cases halted, and the efficiency of government expenditure fell as liquidity constraints tightened and non-salary expenditures were crowded out

Gains from trade: Competition and the factor market.

How do international trade and economic integration alter competitive pressures in economies. Can economic integration increase welfare by alleviating factor market distortions. What are the precise channels through which trade triggers welfare gains. This thesis examines how economic integration can alter competitive pressures in both product and factor markets. Endogenising product market imperfections, the new trade theory highlighted a number of previously unrecognised sources of gains from trade. This thesis will suggest that further gains from trade can be derived by endogenising factor market imperfections. Although these gains have been commonly alleged to by practitioners, they have hardly been formalised. Chapter 2 empirically assesses the importance of the various channels through which procompetitive gains from trade may be attained. Using a panel of 2400 Mexican firms between 1984-1990, it is shown that markups fell with trade liberalisation. It is also suggested that liberalisation has increased total factor productivity of the firms in the sample. The remainder of the thesis is of a theoretical nature. Chapter 3 focuses on the market for intermediate inputs in the presence of hold-up. In a closed economy, a bilateral monopoly is operating and inefficiencies arise in both product and factor markets. As the economy opens up to trade, procompetitive effects suppress the margin between prices and marginal costs increasing allocative efficiency. If downstream firms become internationally mobile, productive gains may arise from increasing returns to scale and intensified competition in the input market. Chapter 4 focuses on the unionised labour market. If countries are symmetric, trade will increase competition in the product market raising labour demand. The effect on wages is ambiguous. If firms are internationally mobile, the threat of firm mobility reduces both wages and unemployment

Beyond convergence: Poland and Turkey en route to high income

This paper compares and contrasts the policy reform experiences of Poland and Turkey en route to high income. For both countries, globalization has presented unprecedented opportunities to catch up, unleased by integration into European and global markets and the establishment of macroeconomic discipline. These opportunities were reinforced by the creation of economic institutions to strengthen competition and support private entrepreneurship, catalyzed by the convergence process with the European Union. Both Poland and Turkey have shown resilience following the 2008 global crisis, but continued success will require renewed structural reform measures. Dealing with the challenging of aging while at the same time finding a way to sustain productivity growth through greater domestic innovation is shaping Poland’s policy agenda. Turkey's structural and demographic potential as well as its strategic location between the markets of Europe and Asia offers attractive value proposition to investors, which could be further enhanced with improvements in business regulations and economic governance

India—East Asian Growth, Latin American Deficits

Over the past 25 years, India’s economy grew at an average real rate of close to 6 percent, yet by the end of this period, the general government debt-to-GDP ratio was 34 percentage points higher. We examine the links between the public finances and growth in the post-1991 period. The persistent combination of high growth and high fiscal deficits appears less schizophrenic once macro-micro linkages and lags are taken into account. We argue that the main factor in the deterioration of government debt dynamics after the mid-1990s was not fiscal profligacy but a reform-induced loss in trade, customs and financial repression taxes; these very factors plus lower entry barriers have over time contributed to stronger microfoundations for growth by increasing competition and hardening budget constraints for firms and financial sector institutions. We attribute the unexpected growth resurgence of the past few years to the lagged effects of these factors, which have taken time to attain a critical mass in view of India’s gradual reforms. Similarly, the worsening of the public finances after the mid-1990s can be attributed to the cumulative effects of the tax losses, the negative growth effects of cuts in capital expenditure that were made to offset the tax losses and a pullback in private investment (hence growth and taxes) after what increasingly appears to have been a low-quality investment boom during the first few years of the reforms. Capital expenditure cuts have contributed to the infrastructure gap which is now the biggest constraint on private investment and continued rapid growth. We discuss the on-going reforms in revenue mobilization and fiscal adjustment at the states’ level, which if successfully implemented, will better align the public finances with growth and contribute fiscal space for infrastructure

State Fiscal Reforms in India: Progress and Prospects

Following two decades of relatively rapid growth, and a decade of liberalization, there is growing confidence within India, as well as internationally, about the state of the economy, and India's development potential. Nonetheless, and particularly since the late nineties, when India's states experienced a sharp fiscal deterioration, they have faced a squeeze on development spending, particularly acute in the poorer ones. In response, most state governments embarked on fiscal reforms, aimed at reducing deficits, and enabling effective interventions in priority areas. States in India play an increasingly important role in devising, and implementing policies to stimulate economic growth, and promote human development. But the performance of India's states is increasingly divergent, State deficits and debt levels rose sharply in the late nineties, and off-budget liabilities also increased rapidly. This sharp fiscal deterioration gave rise to state-level fiscal adjustment efforts, which in recent years have shown some signs of improved fiscal performance. Concerns about the level, and composition of fiscal deficits remain. The report states that a halt in reforms would endanger the states quality and quantity of productive expenditures, while debt levels would steadily build. It reviews expenditure reforms - particularly salaries, at the core of expenditure restructuring - and, pensions as a rapidly-mounting liability, which can be contained by parametric reforms, and longer-term structural reforms, while also examines subsidies, exemplifying the difficulties involved in reforming subsidy regimes. Regarding power sector reforms, commercial discipline should be a top priority. Public enterprise reforms are outlined, suggesting that while immediate fiscal gains may not be achieved, such reforms will prevent future budgetary support from keeping loss-making enterprises afloat. On examining revenue reforms, the report indicates these are essential to reduce fiscal imbalances, suggesting the elimination of tax on inter-state exports is critical, and should proceed with, or without the value-added tax (VAT), specifying tax administration reforms are perhaps more important than tax reforms. On strengthening the fiscal federal framework, it is recommended States need more flexibility to borrow, but under a centrally-imposed aggregate borrowing cap. Three institutional reform would therefore help fiscal federalism in India: Finance Commission as a permanent body; entrusting a single agency in compiling timely state-level fiscal data; and, reviewing the role of the Planning Commission

Expenditure Implications of India's State-level Fiscal Crisis

India's states have significant developmental expenditure responsibilities. While the "fiscal crisis" which engulfed India's states in the late nineties led to higher deficits and debt levels, it was also associated with a rapid increase in expenditure levels, and it might be thought that this would have increased the development effectiveness of the state governments. However, a closer look at the data reveals that this is not the case. The main positive fiscal development in the post 1996/97 period is a pick up in real growth in government capital expenditure. In other respects, the fiscal crisis weakened the developmental and poverty impact of state governments especially in the poor states. Real growth of expenditure in health and education slowed, in some cases halted, and the efficiency of government expenditure fell as liquidity constraints tightened and non-salary expenditures were crowded out.