Fiscal Deficit, Crowding Out, and the Sustainability of Economic Growth: The Case of the Indian Economy
This study examines the long-run relationship between the fiscal deficit, the crowding out of private capital formation and net exports for the Indian economy during the period from 1980-81 to 2008-09.
Applying unit root tests and cointegration techniques that allow for endogenously determined structural breaks, the analysis is done separately with the gross fiscal deficit of the central government, and the combined deficits of the central and state governments. The results do not indicate any long-run relationship among the variables, despite the balance-of-payments crisis of 1990-91 and sudden jump in deficits from 1997-98 onwards. Our finding supports neither a crowding out nor a crowding in hypothesis between government spending and private investment. On the contrary, our result hints at the Ricardian Equivalence Theory on public debt, implying thereby that it does not matter whether a government finances its spending with debt or a tax increase, the effect on the total level of demand in an economy will be the same.
The fiscal adjustment carried out as a combination of revenue augmenting measures as well as appropriate expenditure adjustment has helped to achieve sustained high economic growth with macroeconomic stability. While the actual numbers for disciplining fiscal deficit is debatable, the way forward for India is the recognition that fiscal responsibility rules are imperative for sustaining macro output growth. Further, standalone fiscal deficit targets would not be sufficient if not supported by targets on revenue or primary deficit.
Available in:
Regions and themes
ISBN / ISSN
Share
This page contains only a summary of our work. If you would like to have access to all the information from our research on the subject, you can download the full version in PDF format.
Fiscal Deficit, Crowding Out, and the Sustainability of Economic Growth: The Case of the Indian Economy
Center for Asian Studies
Asia is a nerve center for multiple global economic, political and security challenges. The Center for Asian Studies provides documented expertise and a platform for discussion on Asian issues to accompany decision makers and explain and contextualize developments in the region for the sake of a larger public dialogue.
The Center's research is organized along two major axes: relations between Asia's major powers and the rest of the world; and internal economic and social dynamics of Asian countries. The Center's research focuses primarily on China, Japan, India, Taiwan and the Indo-Pacific, but also covers Southeast Asia, the Korean peninsula and the Pacific Islands.
The Centre for Asian Studies maintains close institutional links with counterpart research institutes in Europe and Asia, and its researchers regularly carry out fieldwork in the region.
The Center organizes closed-door roundtables, expert-level seminars and a number of public events, including an Annual Conference, that welcome experts from Asia, Europe and the United States. The work of Center’s researchers, as well as that of their partners, is regularly published in the Center’s electronic journal Asie.Visions.
The Oceania Factor in France’s Evolving Indo-Pacific Strategy
This paper examines the two-way relationship between France’s Indo-Pacific strategy and developments in Oceania. Oceania was not a priority in the initial years of France’s Indo-Pacific strategy, as the region was largely treated as secondary to major strategic hotspots and key partnerships, while overseas territories were primarily handled as domestic issues and recipients of a top-down strategy.
France’s View: From Diplomacy to Public-Private Action
France has emerged as the EU’s IMEC forerunner, combining port infrastructure, diplomatic alliances and public-private cooperation. With Marseille Fos at its core, the country brings a strategic hub for logistics, energy and digital connectivity to the corridor.
Trump II, the Crisis of the Rules-Based Order and Europe’s Indo-Pacific Strategy
This article examines the implications of Trump II for Europe’s engagement in the Indo-Pacific. The piece contends that Trump II is accelerating the erosion of the rules-based order and undermining the relevance of the Free and Open Indo-Pacific (FOIP) concept, while forcing Europe to refocus on its own continental security amid US retrenchment. Paradoxically, these very constraints create conditions for a more autonomous, pragmatic, and explicitly interest-driven European engagement in the Indo-Pacific, rather than outright withdrawal.
China and Trade in Critical Raw Materials (CRMs)
Critical raw materials (CRMs) have become central features of a new dynamic in global power politics, with China now wielding considerable leverage. Amid rising regional and global uncertainty, resource security is back in the spotlight as a key determinant of sovereignty and national security for Europe, its allies and its partners. The very survival of key, even vital industries, from automotive to aerospace to health to energy to defense, is at stake.