Indian Public Finance in the 1990s: Challenges and Prospects

This study updates and extends to the period 1988/9--1992/3 our earlier analysis of the public finances of India. The foreign exchange crisis of early 1991 forced the government to recognize the severity of the fiscal crisis it was facing and led to the implementation of a restrictive fiscal and monetary programme. We conclude that the magnitude of the fiscal correction undertaken was insufficient. Further significant increases in the public debt/GDP ratio would be destabilizing and inflationary financing of public sector deficits is not an option. We calculate that a further permanent increase in the public sector primary surplus of about four and a half percentage points of GDP is needed to achieve the modest objective of stabilizing the public debt/GDP ratio. On the revenue side, this increase in the primary surplus is best achieved by expanding the direct and indirect tax bases and improving tax administration, collection and enforcement. On the expenditure side, reductions in the general government wage bill, in fertilizer subsidies, in some (but not all) food subsidies and in operating and capital subsidies to public sector enterprises are recommended. For efficiency reasons and to support the proposed expenditure cuts, the overwhelming majority of the public sector enterprises should be privatized and cut off from further government subsidies.