Budgetary Arithmetic, Fiscal Imprudence

and Macroeconomic Implications

Notwithstanding the attempts made to undo the budget deficits initiating the fiscal reform
process, the art of budget making in India is far from salutary both in terms of content, and
macroeconomic and social implications. Given the political economy fundamentals (institutional
constraints), the adherence to fiscal rules may, at best, contain the overall public expenditures
through fiscal pruning measures, but may fail in addressing (i) the distributional effects of public
expenditure policies, and hence, (ii) the composition of public expenditure.
D TRIPATI RAO

I
Introduction

ollowing the political economy

debate on deficit reduction, during
the 1970s and 1980s, Latin America,
Europe and the US made serious efforts
to bridge the gap between growing public
expenditure and revenue. Not surprisingly,
it is never been a cakewalk, as deficit
reduction policies are always associated
with politically sensitive charged issues
such as, the retrenchment of labour, social
expenditure cuts and trimming of large and
inefficient bureaucracies following the
retreat of overextended welfare state
[Alesina et al 1998]. In India over two
decades of fiscal profligacy overheated the
economy resulting in double-digit inflation, widening fiscal deficit and unsustainable current account deficit; consequently
erupting a macroeconomic crisis in mid1991. Since then containing the fiscal
deficit, as an essential prerequisite for sound
macroeconomic management, is high on
the reform agenda.
Fiscal reform process became the central
focus of the stabilisation-cum-structural
adjustment programme for achieving
macroeconomic stability in India. The
policy document outlined the need for the
fiscal reform process to contain the deficit
through various fiscal discipline measures.
In the recent period, there is even a proposal for a constitutional cap on the fiscal
deficit (Fiscal Responsibility Act)1 and the
introduction of zero-based budget. However, so far, baring some piecemeal and
ad hoc measures, successive governments
failed to push through fiscal reform measures against strong resistance from all
quarters, despite oft-repeated proclamations for fiscal discipline [Rao 2000]. What
Economic and Political Weekly

is more worse, one step forward and half

a step backward fiscal consolidation
measures proceeded altogether in the
wrong direction with the axe falling on the
growth and planned development-oriented
development and capital expenditure with
the significant decline in public investment in economic and social infrastructure.
The recent budget 2001-2002, which came as
a pleasant surprise for the euphoric private
corporate sector, given the tax concessions, but it also reflected the same trend.2
Moreover, focusing on the fiscal discipline, the ways with which the final aggregate fiscal figures arrived at are of much
cause of concern, since they do not reflect
any fundamental change in the structure
of the fiscal deficit insofar as alteration of
the composition of the fiscal deficit is
concerned. What then could be the plausible implications of such fiscal corrections, on long-run behaviour of the
economy? In addition, do they entail larger
social implications in terms of social unrest
and political costs, which might even
threaten the very process of economic
reforms? Why has it been an Achilles heel
for successive finance ministers, notwithstanding the general consensus on irrevocability of the reform process, and the need
for fiscal reform to achieve fiscal discipline through meaningful fiscal management, which is implicitly acting as a constraint for pursuing other reform policies?3
An examination of these issues in essence
would point out to the inherent institutional constraints for implementing the
credible structural reform measures on the
fiscal front.
This paper, in the following section
outlines a brief history reflecting the
emergence of fiscal profligacy. And then
examines the trends in the major fiscal

May 25, 2002

aggregates bringing out the imprudent

nature of fiscal adjustment. Section III
surveys the macroeconomic and social
environment where the observations are
fairly indicative of the present state of
Indian economy. Section IV, commenting
on the political economy of budget, highlights the institutional constraints. In the
end, it argues that fiscal rules may not serve
the purpose.

II
Fiscal Slippage
Fiscal policy is an exercise of government to control public spending and taxation to achieve broader economic objectives of stabilisation and growth. Against
the failure of classical-monetary policy in
the 1930s, the Keynesian diagnosis of
demand management stemmed the rot to
calibrate government spending and taxation for generating income, employment
and output. Since then, active fiscal policy
using the instruments of taxation, public
borrowing and public expenditure, has
become a major tool to achieve desired
macroeconomic goals. However, certain
necessary modifications were needed
keeping in tune with the peculiarities of
developing countries such as, sharp income equality, higher marginal propensity
to consume and low savings (mostly in
unproductive channels). Thus fiscal policy
aimed at channelling these unproductive
savings into productive ones by the philosophy of tax the rich and spend on the
poor. The governments incurred expenditure for the provision of economic and
social overheads public utility services,
banking and credit institutions, promotion
of agriculture and (basic) industries.
Governments made efforts to mobilise idle

2081

resources (savings) effectively for capital

formation and reduction of income inequalities. Therefore, fiscal policy clothed
in the development character in addition
to its objective of stabilisation and growth.
In India, since independence, given the
mixed economy set-up where the state
played a dominant role, fiscal policy has
evolved as an important macroeconomic
instrument to achieve national objective of
growth with equity. For the first two
decades, public finance was managed
prudently with current revenue surpluses
even when government incurred significant investment expenditures as state-led
industrialisation was in full swing. However, subsequently widening resource gaps
witnessed with record deficits. The revenue surplus which was accounted for one
per cent in the 1960s, one and halve per
cent in the 1970s, turned to a deficit of
halve a per cent of the GDP in the early
1980s and 3.5 per cent in 1991. This reflected in alarming fiscal deficit of 7 per
cent of GDP for the same year. Both failures
in revenue (tax) generation and expenditure control accounted for. More importantly the deterioration of public finance
started with the shift in pattern (composition) of public expenditure with the
institutional (political) failure that witnessed the emergence of populist policies [Joshi and Little 1998]. The deficits
grew with the growing power of interest
groups, misappropriated susbsidies and
decaying public morality and corruption.
As a general reflection, glaringly, during
the 1980s economic growth was led by
consumption expenditure a direct contrast
to the 1970s which was led by investment
expenditure. Thus such an expansionary
consumption-oriented fiscal policy overheated the economy brewing a macroeconomic crisis in the mid-1990s; thus called
for a meaningful deliberation of fiscal
operation.
The incidence of global changes coinciding with imminent domestic compulsions, borne out of prolonged macroeconomic mismanagement, courtesy fiscal
profligacy blowing macroeconomic fundamentals to unsustainable levels, heralded
economic reforms under the flagship of
stabilisation-cum-structural adjustment
programmes. Waxing eloquently, these
measures rather compellingly substitute
economic growth for poverty reduction, a
full circle in the development of intellectual thought. The implicit argument is that
a larger cake achieved by increased resource and capacity utilisation, a resultant

2082

of enhanced efficiency and productivity,

is an essential prerequisite for percolation
of benefits with fair distribution. For that,
a competitive environment as a springboard for larger and efficient private participation must be followed by curtailment
of inefficient resource use by the state.
Precisely towards these ends, the consequent budgets followed by successive finance ministers heroically made attempts
to undo the archetypical monotonic budgets of deficit initiating the fiscal reform
process. The fiscal reform measures aimed
at reduction of budget deficit through expenditure controls elimination of
monetisation of deficits, progressive reduction of subsidies and closure of sick
public sector units (PSUs), and revenue
generation through greater tax compliance
with tax reforms reduction and
rationalisation of tax rates (Economic
Survey, various years). Despite the efforts,
however, this process met with very little
success either in containing unproductive
consumption expenditure or in revenue
generation. Thus the nature of fiscal correction through fiscal pruning underscored
the lack of credibility of the fiscal reform
programme and the art of budget-making
is far from optimal both in terms of content, and macroeconomic and social
implications.
Successive budgets received premature
applause with fiscal authority failing to
show fiscal marksmanship, except for the
year 2000-01, since the initiation of reforms. All these years the ex ante budget
estimated figures far diverged from the ex
post actual revenues falling short and
expenditures exceeding the targets (see
Economic Survey, various years). Secondly,
the structural composition of the fiscal
deficit remained unchanged since successive budgets has not recorded any significant qualitative change. In essence, the
growth-oriented character of the budget
is still elusive due to imprudent fiscal
adjustments. The examination in the

trends of major fiscal aggregates entails.

Therefore, even when the fiscal deficit
as a per cent of GDP declined from 6.6
in 1990-91 to 5.1 in 2000-01, with the
declining total government expenditure
from 17.3 to 15.3, the consumption expenditure increased from 6.3 to 6.4 for the
same period. Consequently, the revenue
deficit increased from 3.3 in 1990-91 to
3.6 in 2000-01. However, the axe fell
continuously on capital expenditure. The
capital expenditure perceptibly declined
from 4.4 per cent of GDP in 1990-91 to
2.4 in 2000-01. The primary deficit investment from 1.7 per cent in 1990-91 turned
to a negative of 0.1 in 2000-01.4 Even for
the passing year 2000-01 the final figures
for fiscal deficit could be achieved not
because of any alteration of composition
compressing revenue expenditure even
to the targeted level or increasing capital
expenditure, for which all the tall claims
have been made. The capital expenditure
fell short from the targeted 2.6 per cent
of GDP by 0.2 per cent. The revenue
expenditure totalling Rs 2,84,000 crore
exceeded the targeted level to the tune of
Rs 3,000 crore whereas capital expenditure on plan account fell by Rs 5,402 crore
resulting in around 10 per cent cut in the
central plan outlay. Therefore, revised
capital expenditure figures over budgeted
on economic and social services agriculture, rural development, infrastructure,
health, social security, so on and so forth,
registered a negative. For the next year also
the targeted plan capital expenditure of
Rs 5,000 crore is directly tied to the success of disinvestment proceeds of estimated Rs 12,000 crore. But having seen
the experience with the pace of disinvestment programme in the recent, it would
appear to be nothing less than a wishful
thinking. More worrisome fact is that Rs
77,000 crore constituting over 70 per cent
of the borrowings goes in mitigating unproductive expenditure. The increase in
overall deficit is also due to less success

Table 1: Selected Fiscal Aggregates*

(As Per Cent of GDP at Market Prices)
Fiscal indicators

1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 200091
92
93
94
95
96
97
98
99
2000 2001

Fiscal deficit
6.6
Revenue deficit
3.3
Total expenditure
17.3
Consumption expenditure 6.3
Capital expenditure
4.4
Net tax
revenues
7.6

4.7
2.6
16.2
6.0
3.6

4.8
2.5
15.8
6.3
3.4

6.4
3.8
15.9
6.5
3.3

4.8
3.1
14.9
6.2
2.9

4.3
2.5
14.2
5.9
2.4

4.1
2.4
13.9
5.6
2.3

4.8
3.1
14.2
5.9
2.4

5.1
3.7
14.5
6.2
2.2

7.7

7.2

6.2

6.7

6.9

6.8

6.3

5.9

5.4 5.1
3.5 3.6
15.2 15.3
6.5 6.4
2.5 2.4
6.5

6.6

Note:
* All fiscal aggregates relates to central government.
Source: Economic Survey 1999-2000 and 2000-2001.

Economic and Political Weekly

May 25, 2002

in resource generation. The revenue receipts

as a per cent of GDP declined from 9.7
in 1990-91 to 9.3 in 2000-01. Net tax
revenue of the central government as a per
cent of GDP declined from 7.6 per cent
in 1990-91 to 6.6 per cent in 2000-01
mainly because of a significant fall in
indirect taxes (customs and excise), which
are not compensated by the rise in direct
taxes. Against the constrained revenue
generation, fiscal adjustment was made
through cutting down public investment
activities across the board. The real gross
domestic capital formation of the public
sector as a per cent of GDP witnessed
a significant fall from 9.7 in 1990-91
to 6.8 in 1999-00.
The situation at the state level is more
precarious as the major fiscal indicators
reflect. The fiscal deficit as a per cent of
state domestic product (SDP) increased
substantially from 2.9 in 1990-91 to 4.1
in 1999-00 with equally matching rise in
the revenue deficit from 0.9 to 2.1, whereas
revenue receipts declined from 11.7 to
11.2. The rise in expenditure can be seen
through the change in political environment with the rise in regional political
parties that followed political populism.
Consequently, the development expenditure as a per cent of SDP declined from
11.1 in 1990-91 to 9.6 in 2001. On the revenue
side, apart from the existing mode of sharing
of tax revenues and multilayered tax systems, recently states following competitive populism went all out in giving tax
concessions to attract foreign investment ignoring long-term implications.
The efficacy of public expenditure can
be gauged from its nature of utilisation.
In other words, fiscal discipline is achieved
only when cut in non-developmental current consumption expenditure makes for
fiscal adjustment. In contrast as can be seen
the adjustment leaves much to be desired.
Consequently the immediate fallout of
such fiscal adjustment has been, as can be
seen from Table 2, on development expenditure, which as a per cent of GDP fell from
10.3 per cent in 1990-91 to 6.2 per cent
in 2000-01. So also plan outlay and plan
expenditure fell from 6.6 and 4.9 to 5.0
and 4.0 as per cent of GDP for the same
years, respectively. These developments
reinforce the point that the nature of fiscal
correction belies fiscal discipline, however defined and would have definite
medium- and long-term implications for
the growth process. In what follows is a
discussion on macroeconomic and social
environment.

Economic and Political Weekly

III
Equilibrium Recession
In modern macro-economic parlance, the
current macroeconomic environment in
India, reading through the macroeconomic
parameters high real interest rates, low
capital investment and low share values,
would be termed as an equilibrium recession or low output equilibrium [Frank
1995]. This is an equilibrium since low
output and resulting low income lead to
low savings that match low investment.
Real GDP growth down from 6.4 per cent
in 1999-00 to 6.0 per cent in 2000-01 due
to fall in growth in agricultural production
from 2.7 per cent to -3.5 per cent and
industrial production from 6.5 per cent to
5.7 per cent. The sectoral analysis shows
that the service sector growth also fell
down from 9.6 per cent to 8.3 per cent.
Gross domestic savings and investment
are stagnating at just over 22 and 23 per
cent correspondingly. The low growth of
2.1 per cent in non-POL imports compared
to an increase of 8 per cent in the previous
year reflects a weak domestic demand and
subdued industrial activity. The third
quarter (Q3) (for 2000-01) bank credit
dipped by Rs 10,000 crore for the lack of
corporate demand. The manufacturing
sector reeling under a recession as Q3
automobiles sector growth fell by 13.4 per
cent. Recently inflation raised its head to
8.3 per cent backed by 17.7 per cent inflation in electricity, gas and water supply
component after a prolonged period of
sustained decline. Real interest rates remained high at around 9 per cent. The
economy is tottering under a severe effective aggregate demand with a subdued
market. The slide in the private corporate
sectors gross domestic capital formation
continued as it declined as a per cent of
GDP from 8.0 to 7.9. Growth in private
final consumption expenditure also fell
from 7.2 per cent to 4.1 per cent.
These developments are a continuation
of the turnaround in the performance of
the Indian economy since the mid 1990s

as growth in all the constituent sectors

receded. As can be seen from Table 3, both
agricultural and industrial growth has
faltered. For last couple of years the service sector growth was also moderate. The
fall in the organised public sector employment to a negative rate of growth has not
been compensated by the private sector
absorption of labour. With the declining
rates of capital formation, savings and
investment rates as a per cent of GDP fell
from 24.3 and 27.7 in 1990-91 to 22.3 and
23.3 in 1999-00, respectively. The growth
in the economy has slowed down. Recent
research also provides evidences pointing
out the adverse income distribution with
the arrest in the reduction of rural poverty
worsening income equality, employment
and quality of farm and non-farm employment, fall in real income (wages) and
increase in casualisation and migration
[Nagarj 2000, Panchamukhi 2000 and
Ravallion 2000].5 Therefore, both growth
and distributional fallout has been recorded. In turn these developments fed
back into the budget deficits since the
elastic revenues fell steeply in the downturn against pre-committed rigid expenditures.6

IV
Political Economy of Budget
Making
The forgoing analysis clearly brings out
the imprudent fiscal adjustment process in
India. Controlling overall public expenditure remained the preoccupation to contain
the fiscal deficit overlooking the composition of it. Therefore, misguidedly, fiscal
deficit, rather than revenue deficit, became
the focus of attention. The political
economy of budget making paraded by the
powerful interest groups stall the introduction of any efficiency enhancing measures,
virtually forced successive governments
to accommodate the historical drag of draconian fiscal deficits; being unable to wipe
out consumption expenditure. Therefore,
the revenue deficit, which had shown a

Table 2: Major Expenditure Heads

(As Per Cent of GDP at Market Prices)
Types of Expenditure
Development
Expenditure
Social services and
Poverty Alleviation
Plant outlay
Plan expenditure

1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 200091
92
93
94
95
96
97
98
99
2000 2001
10.3

9.1

8.7

8.4

8.2

7.1

6.9

7.3

7.8

6.8

6.2

0.6

5.0

0.5

4.9

0.5
6.6
4.9

0.6
7.0
5.1

0.6
6.9
4.7

0.6
6.3
3.9

0.7
6.4
3.9

0.8
5.3
3.9

0.8
5.0
3.8

0.9
4.7
3.9

0.8
5.0
4.0

Source: Economic Survey 1999-2000 and 2000-2001.

May 25, 2002

2083

declining trend, once again widened. For

stabilisation to be complemented by structural adjustment measures, one would have
expected an increase in public investment
to offset the contractionary impact of fiscal
retrenchment giving a qualitative change
to the fiscal adjustment. But on the contrary, shortsighted policies biased in favour
of consumption expenditure at the cost of
investment cuts came at a high price of
faltering economic growth. Whatever moderate success has been achieved in the
fiscal adjustment process is through indiscriminate cuts in the capital expenditure
and public investment downplaying the
state role in inducing investment activities.
Consequently, no tangency between the
withdrawal of the public sector and the
entry of the private sector has been noticed. As a result productive sectors such
as, agriculture and industry starved off
resources.7
While the total public expenditure came
down sharply, the redistributive aspect of
fiscal expenditures was nullified in the
absence of qualitative alteration in the composition of public expenditure. Given the
political economy of budget-making, public
expenditure was tuned to the weight of the
interest groups as reflected by the sharp
fall in plan development (and social)
expenditures. In addition, budgets misdirectedly squeezed allocated resources
across the board, thereby depriving the
common man of his accustomed benefits,
to cover-up deficits rather than making any
concerted effort to improve functional
efficiency for channelling resources effectively to the target groups.
On the other hand, protagonists of reforms vehemently argued for tax cuts.8
Tax cuts are offered even when one has
not witnessed the Laffer curve effect a
greater compliance by the reduction of tax
rates yielding higher revenues. Again, the
lack of buoyancy in tax reforms is due to
the lack of institutional (administrative
inefficiency) improvements. Besides, it is
yet remains to be seen whether corporate
tax cuts based on the supply side economics that tax cuts quickly revives the economy
through productivity gains has any foundation. In the post reform phase the private
corporate sector has not responded
favourably in bringing in long-term efficiency through R and D and in-house
technology generation [Basant 2000].
Therefore, the structural and institutional
(political) factors are acting as constraints
in the redistributive efforts of public
expenditure.

2084

V
Policy Imperative
Taking a leaf from the experiences of
developed and developing countries and
based upon the emphasis on the qualitative
aspects of economic growth, there is growing convergence in the view that income
distribution influences economic growth
insofar as the level of income inequality
and hence poverty adversely affect economic growth. Moreover, this fresh perspective contends that there is no tradeoff between redistributive and efficiency
goals in public expenditure policies. Therefore, economic policies including budgetary policies having strong distributional
effects are favourable [Schwartz and Teresa
2000]. Specifically, formerly centrally
planned economies in the transition from
plan to market witnessed worsening distributional consequences reflecting an
increase in poverty. Therefore, public expenditures potentially having redistributive effects are sought for. Indeed, historically, big governments through public
expenditure played an important stabilising
role in moderating economic fluctuations
[Minsky 1986]. The usual investment
multipliers helped in generating income
and employment. Such expenditure, however, must qualify a big qualitative
condition since income distribution depends on the composition of public expenditure policies. It must be productive public
investment in economic and social infrastructure which is growth enhancing as it
crowds-in private investment.
In India, what matters the most is investment in rural infrastructure and social
services. Moreover, since the recent Budget 2001-02 introduced flexible contracts
in the context of labour laws, that aim for
subcontracting and outsourcing together
with dereservation of some small-scale
industries, may inflict short-run adjust-

ment problems by putting upward pressure

in the organised labour market. For that,
measures such as credit delivery, rural infrastructure creation food for work programmes, and social security measures
(health care and education) must be executed unfailingly. For a labour surplus
country like India where inequality and
poverty are predominant, employment and
income generation must be the prime
consideration for any policy to succeed in
the long-run. Public expenditure in terms
of public investment will play not only a
crucial role for a rising employment and
income generation but also sharing their
benefits across all groups. Broadening the
constituency of public expenditure will in
effect solve the political economy problem. Fiscal prudence is not just containment of public expenditure but importantly altering the pattern of public expenditure in terms of public investment and
a more productive use so as to supplement
the private sector in crowding in the private sector to boost the economic activity.
Macroeconomic policy-making is an art
as much as science. Economic cycles,
economic downturns and upturns, call for
different sets of appropriate fiscal and
monetary policy measures to pull and
push the economy, without drifting from,
or being inconsistent with, long-term
objectives of growth with development.
Since central banks are powered to contain
aggregate demand through restrictive
monetary policy but not in reversing it,
they can only pull but not push the
economy. Therefore, in the downturn the
onus squarely falls on fiscal policy as a
counter-cyclical tool in pushing the
economy to a higher equilibrium growth
path. The present macroeconomic picture
is the gloomiest one in the post-reform
phase, born out of an imminent slowdown
in the domestic economy. Growth in
almost all the constituent sectors has

Table 3: Selected Macroeconomic Aggregates

(in Per Cent)
Indicators

1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 200091
92
93
94
95
96
97
98
99
2000 2001

Growth Rates
GDP
5.4
Agricultural production 3.8
Industrial production
8.2
Employment
1.4
Public sector
1.5
Private Sector
1.2
Ratios
Savings rate *
24.3
Investment rate *
27.7

0.8
1.9
0.6
1.2
0.8
0.2

5.3
4.2
2.3
0.4
0.6
0.1

6.2
3.8
5.6
0.7
0.6
1.0

7.0
5.1
8.4
0.6
0.2
1.6

7.3
2.7
12.8
1.5
0.2
5.6

7.5
9.3
5.6
1.1
0.7
2.1

5.0
6.1
6.6
0.3
0.7
0.3

6.8
8.1
4.0
0.1
0.0
0.1

22.9
23.4

22
23.9

22.5
23.1

25.0
26.1

25.1
26.8

23.2
24.5

23.5
25.0

22.0
23.0

6.4 6.0
2.6 3.5
6.2 5.7

22.3
23.3

Note: * Savings and investment rates are as a proportion of GDP.

Source: Economic Survey 1999-2000 and 2000-2001.

Economic and Political Weekly

May 25, 2002

bottomed out, aggregate demand has perceptibly declined, there have been largescale losses due to unforeseen natural calamities and high fiscal deficit coupled
with external adverse developments high
oil prices, slowdown of the US economy
and declining capital flows. As the Economic Survey 2000-01 pointed out a demand augmented stimulation to growth is
needed. Moreover, from a medium- and
long-term perspective, what are necessary
are liberal policy measures that would free
the economy from the shackles of rigidities, institutional or structural, which would
facilitate both (i) utilisation of idle capacity, and (ii) enhancement of productive
capacity through efficiency gains. In this
given scenario, fiscal policy along with
monetary policy can act as a demand
management tool.
In this context, the Fiscal Responsibility
Act needs a critical look. The introduction
appears to be motivated on the grounds of
sustainability (of public debt) and
intertemporal equity issue associated with
discretionary fiscal action. The act can be
seen as economic constitutionalism that
intends to impose stricter economic discipline on economic decision-makers for
the lack of credibility in the past. However,
the pertinent question is whether economic
policy should be subject to normative rules
or strict legal constraints as the use of rigid
rules perhaps could be a second-best
solution to stabilise the economy [Tobin
1983]. Given the political economy fundamentals in India, it may at best contain
the overall public expenditures through
fiscal pruning measures, but may fail to
address (1) the distributional effects of
public expenditure policies, and hence
(2) the composition of public expenditure.
From macroeconomic perspective, the
instability in the demand for money and
the ambiguous relationship between interest rates and output, such deficitism for
a balanced budget as a cure for higher
interest rates, inflation and an overextended
state seems to be a highly imperfect instrument for controlling economy activity. Discretionary fiscal policy still can play an
active role through the changes in government spending, income transfers and indirect tax changes [Wren-Lewis 2000].
After all the fiscal responsibility act is a
means to an end of achieving fiscal discipline. The objective is to increase the
institutional efficiency for devising costeffective, efficient and equitable policies.
For that, a perceptible change in the institutional setting must be seen through.

Economic and Political Weekly

Policies themselves do not matter if not

for guiding interacting agents to generate
better economic and social equilibria. The
basic thrust should not be just containing
the fiscal deficit but altering the composition of the fiscal deficit to ensure macroeconomic stability and growth. Tinkering
with macroeconomic parameters, which
are increasingly endogenously determined
in the system, will not work. Since these
macroeconomic parameters are state dependent variables, they are reproduced by
the system and no longer can be imposed
as constraints on the system. Therefore, a
better institutional environment by itself
would ensure reproduction of good states
of the world. -29

Notes
[Thanks are due to Romar Correa for his editorial
comments on an earlier version]
1

3
4
5

6
7

For medium term management of the fiscal

deficit the budget proposed the Fiscal
Responsibility Act with the introduction of the
Fiscal Responsibility and Budget
Management Bill, 2000, in Lok Sabha (lower
house of the parliament) in December 2000.
The proposed legislation provides for a legal
and institutional framework to eliminate
revenue deficit, bring down the fiscal deficit,
contain the growth of public debt and stabilise
debt as a proportion of GDP within a time
frame. For more details see, Ministry of Finance
(2000).
Of course, for the first time in the post-reform
period, the Budget 2001-02 announced some
bold structural measures such as, downsizing
the government, dereservation of small-scale
sectors, flexible contract in the context of
labour laws and decontrolling prices of sugar,
fertiliser and drugs. But as will be argued,
leaving aside their utility, given the institutional
constraints, their successful implementation
yet remains to be seen.
For instance, financial sector reforms are not
likely to succeed both in terms of their content
and speed with such failure.
The data not presented in the tables, but
mentioned throughout the text, however, relates
to the same source.
The National Sample Survey (NSS) estimates,
however debatable on the statistical ground,
reported that rural poverty rose to 38.6 per cent
and unemployment levels remained stagnant
[Rao 2000].
Being taxes procyclical and public expenditure
acyclical, the fiscal deficit moves in a countercyclical fashion.
A critical review of performance of the Indian
economy in the post-reform phase has shown
that with the state retreating from investment
activities, the economy lost stimulus. The
private sector initiative in agriculture and
industry found wanting [Rao 2001].
In fact, in the recent years the trend has been
that the barometer for judging the budget
turned out to be announcement of lowering

May 25, 2002

of tax rates and tax concessions, for which the

budgets are applauded or punished. For
instance, this year jubilation is precisely for
the announcement of tax concessions, in spite
of the fact that the targeted fiscal figures are
arrived through curtailing capital
expenditure, whereas in the last year budget
received with utter dismay since it did not
contain any tax concessions. The sharp upward
and downswing of stock prices in the pre- and
post-budget presentation reflects this
sentiment.

References
Alesina, Aberto, Roberto Perotti and Jose Tavares
(1998): The Political Economy of Fiscal
Adjustments, Brooking Papers on Economic
Activity, Vol 1, pp 197-266
Basant, Rakesh (2000): Corporate Response to
Economic Reforms, Economic and
Political Weekly, Vol XXXV, No 10,
March 4, pp 813-23.
Frank, Jeff (1995): The Stock Market and
Equilibrium in Huw David Dixon and Neil
Rankin (eds), The New Macroeconomics:
Imperfect Markets And Policy Effectiveness,
Cambridge University Press, Cambridge,
pp 15-33.
Joshi, Vijay and I M D Little (1998): India:
Macroeconomics and Political Economy
1964-1991, Oxford University Press, Oxford
and Cambridge.
Ministry of Finance (2000): Report of the
Committee on Fiscal Responsibility Legislation, Http://finmin.nic.in.
Minsky, Hymn (1986): Stabilising an Unstable
Economy, Yale University Press, New Haven
and London.
Nagaraj, R (2000): Indian Economy Since 1980:
Virtuous Growth or Polarisation, Economic
and Political Weekly, Vol XXXV, No 32,
March 25, pp 2831-39
Panchamukhi, P R (2000): Social Impact of
Economic Reforms in India: A Critical
Appraisal, Economic and Political Weekly,
Vol XXXV, No 10, March 4, pp-836-48.
Rao, D Tripati (1999): Fiscal Prudence is
Pragmatic Politics, The Economic Times,
November 12.
(2000): Rural Economy Needs Reconceptualisation, Business Line, April 4.
(2001): Economic Reforms, Anatomy of
Behavioural Agents and Macroeconomic
Outcomes: Does India Have a Credible Reform
Programme, a paper communicated to Journal
of Economic Issues.
Ravallion, Martin (2000): What is Needed for a
More Pro-Poor Growth Process in India,
Economic and Political Weekly, Vol XXXV,
No 32, March 25, pp 1089-94.
Schwartz, Gerd and Teresa Ter-Minassian (2000):
The Distributional Effects of Public
Expenditures, Journal of Economic Surveys,
Vol 14, No 3, pp 337-58.
Tobin, James (eds) (1983): Macroeconomics,
Prices and Quantities, Blackwell Publisher,
Oxford.
Wren-Lewis, Simon (2000): The Limits to
Discretionary Fiscal Stabilisation Policy,
Oxford Review of Economic Policy, Vol 16,
No 4, pp 92-105.

2085