Ind Eco Essay

1286 Words Sep 9th, 2011 6 Pages
FISCAL POLICY

1991 Economic Reform

The root problem with India’s macroeconomic started in the early eighties when its revenue surpluses were starting to turn into deficits mainly because of the lack of fiscal policies. To finance its investment and current consumption, the government had to borrow externally from multilateral lending institutions, other government external aid, capital market, and non-resident Indians (NRIs). Coming into the 1990s, the external debt had tripled from $22.8 billion in 1983-84 to $69.3 billion in 1990-91. Also by 1990-91, the gross fiscal deficit had grown to about 10% of GDP, of which 4.3% of GDP was for interest payment.

In addition, in 1990, the external investors, including the NRIs, started
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Fiscal Deficit

The implementation of 1991 reforms had resulted in significant improvements in India’s economy. Almost all programs included in the reforms showed promising achievements, with the exception of the fiscal consolidation and tax reformation plans. The shortfall in the fiscal consolidation was reflected in the unsustainable decline of the central government fiscal deficit as shown in the figure X below:

The fiscal deficit went down initially from 6.6% of GDP in 1990-91 to 4.1% of GDP in 1996 only to steadily rise again to 6.1% of GPD in 2001-02 . Two main factors affecting the increase of the fiscal deficit from 1996-97 to 2001-02 are reduction in the total tax revenue, which fell from 10.1% of GDP in 1990-91 to only 8.2% of GDP in 2001-02, and the inefficient expenditure restructuring / management.

As a reaction to the continuing increase of the fiscal deficit, the Fiscal Responsibility and Budget Management Bill was proposed in 2000. The bill, however, took some time to be passed, while the situation got worse before the bill finally was passed as an act (FRBMA) and implemented in mid 2003. In summary, FRBMA was created to: provide a legal and institutional framework to bring down the fiscal deficit, contain the growth of public debt and stabilize debt as a proportion of GDP, and bind future government to a

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