This paper reassesses the sustainability of fiscal policy in India from 1950 to 2010. Overall, the evidence provides a large support to the hypothesis that fiscal policy is “weakly” sustainable, and documents a higher speed of adjustment towards the intertemporal budget constraint with respect to earlier contributions. Notwithstanding this improvement in the fiscal outlook, I suggest that India should pursue a policy of fiscal consolidation in the years ahead, both because the ratio of public debt to GDP is still high compared with other emerging market countries, and because “weak” fiscal solvency implies potential adverse consequences on the management of public debt.
The Sustainability of Indian Fiscal Policy: A Reassessment of the Empirical Evidence
TRONZANO, MARCO ROBERTO
2013-01-01
Abstract
This paper reassesses the sustainability of fiscal policy in India from 1950 to 2010. Overall, the evidence provides a large support to the hypothesis that fiscal policy is “weakly” sustainable, and documents a higher speed of adjustment towards the intertemporal budget constraint with respect to earlier contributions. Notwithstanding this improvement in the fiscal outlook, I suggest that India should pursue a policy of fiscal consolidation in the years ahead, both because the ratio of public debt to GDP is still high compared with other emerging market countries, and because “weak” fiscal solvency implies potential adverse consequences on the management of public debt.
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