Indian Fiscal Policy: A possible escape route

NO : WP-2023-010

AUTHOR : Ashima Goyal

TITLE :  Indian Fiscal Policy: A possible escape route


Historical choices, based on the interaction of domestic structure, including federalism, with global shocks and dominant ideas have left India a legacy of deficits and debt higher than peer countries. These are constraints on fiscal policy. But pragmatic choices made recently have created degrees of freedom despite continuing shocks. Better expenditure-composition, with gradual deficit-reduction, is creating human and physical capital towards inclusive and therefore sustainable growth. Inflation-lowering short and long-term supply-side action is enabling good coordination with monetary policy and countercyclical smoothing of shocks, so that real volatility reduces and interest rates stay below growth rates. Leveraging this snowball effect, as well as reduction in primary deficits, is the fastest path to bring down debt ratios. But it is necessary to bring states on board. Strengthening institutions and incentives can reduce competitive fiscal populism, and improve compliance in lower tiers of government.

Key words: Expenditure composition, supply-side action, inclusive growth, countercyclical, coordination, snowball effect, federalism, populism

JEL Code: E62, E61, E63, E65