A review of India’s fiscal reforms and challenges ahead

Amidst all the economics and inflation chaos, Dr. Reddy gave a superb speech at NIPFP. Dr. Reddy takes you through the various challenges and how certain policies were developed.

It is great to see a Central bank governor to speak so forthright on the fiscal issues.

In the period subsequent to 2003, the central government’s fiscal position has been improving, though there are several underlying fiscal pressures that are not entirely evident in the numbers, as will be explained later. The states’ fiscal positions have also improved significantly during this period and their revenue deficits are close to being virtually eliminated. However, as in the case of the Centre, there are some underlying pressures that are not reflected in the fiscal numbers of the States.

Despite considerable improvement in the fiscal scenario, both at the centre and in the states, India’s combined fiscal deficit (centre and state), as a percentage of GDP, still continues to be one of the highest in the world.

He then covers how various fiscal reforms were introduced. He then reviews challenges ahead:

  • reduce the CRR and the SLR stipulations, as we go along
  • an issue that has come to the fore in the recent period pertains to higher volatility in government’s cash balances maintained with the RBI, which impacts the liquidity conditions in the financial markets
  • magnitude of the combined fiscal deficit of the centre and the states is close to half of the households’ financial savings, which is the largest component of domestic savings. 
  • India is still a bank-dominated system and about 70 per cent of our banks (in terms of business) are owned by the government. So for mon policy to work effectively it has to be in sync with fiscal policy. The single largest source of borrowing for the government being the government-owned banks themselves, this conflict is rather apparent
  • one of the factors imparting rigidity to the interest rate structure in India is the administered interest rates, particularly on small savings instruments
  • effective co-ordination between the fiscal policy and monetary policy is important.  a more aggregate level, in the context of our capacity to respond to global developments, if we have a counter-cyclical policy approach, not only the monetary policy but also the fiscal policy should be counter-cyclical. If the fiscal policy continues to be uni-directional, as we have in our case, with persisting deficits, then the fiscal policy is not in a position to produce a reasonable counter-cyclical impact

He then discusses fiscal policy and its relation with financial markets and external sector.

Nice speech.

2 Responses to “A review of India’s fiscal reforms and challenges ahead”

  1. A Balance Sheet crisis in India?? « Mostly Economics Says:

    […] As I said, nothing much seems to have changed. The original problem of high fiscal deficit/debt continue. Dr Reddy in an excellent overview on indian fiscal policy said: […]

  2. camo Says:

    Hey, you have a great blog here! I’m definitely going to bookmark you! Thank you for your

    info.And this is **Best DSLR** blog. It pretty

    much covers ###Best DSLR## related stuff.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.


%d bloggers like this: