Tuesday, February 26, 2008

How much progress on the fiscal deficit?

Ila Patnaik puts together the facts on deficit reduction, and off-balance sheet items.

You might like to see the recent IMF document, and an article of mine that (among other things) takes stock of India's progress towards fiscal stability. I emphasise three key tests of fiscal stability:

  1. The debt/GDP ratio should drop in all years, barring rare calamities;
  2. Government bonds should be voluntarily purchased by well motivated actors (i.e. not force-fed through financial repression or to PSU financial firms) and
  3. Measurement of deficits and debt should be correct.

At present, India fails on all three counts.


  1. If the PSU banks to be force fed government debt, their government bond holding would be close to the 25% SLR limit.

    But their government bond holding are consistently higher than the statutory SLR limit. Now that might be bad for other reasons, particularly efficiency of capital, but hardly a force-feeding.

  2. I think of "well motivated" as an actor where behaviour is not distorted either by regulation or by ownership.


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