ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Persistent Fiscal Deficits and Political Economy Transitions in India

An Empirical Investigation

The Indian economy has been suffering from a persistent fiscal deficit for the last four decades. With the transition to coalition politics in the 1980s, the country’s political economy characteristics have significantly affected its fiscal policies and outcomes, but this has received scant attention in the literature. The impact of macroeconomic and political economy factors on India’s fiscal deficit between 1978–79 and 2016–17—a period when the country witnessed simultaneous economic and political structural transformations—has been investigated in this study. It finds evidence of a close link between electoral cycles and fiscal populism and between government fragmentation and fiscal profligacy. Additionally, it finds that a strong opposition does not necessarily mitigate the fiscal populism of incumbent governments.

The authors are extremely grateful to EPW’s anonymous referee for their insightful comments and suggestions.
 

Fiscal deficit, which has been a perennial feature of the Indian economy, has become even more pronounced over the last three to four decades. Indias experience of a high and sustained fiscal deficit indicates an extraordinary record of fiscal profligacy when compared to similar economies around the world (Acharya 2016). The phenomenon has been invariant to the changes in the countrys economic growth paradigm and political economy transitions. Thus, high growth phases in the economy have not necessarily led to the better management of fiscal balances nor have stable political regimes necessarily improved fiscal prudence in India (Bijukumar 2004).

The extant literature suggests that the impact of the fiscal deficit on the Indian economy conforms to the neoclassical view that such deficits have been detrimental to growth (Karnik 2002; Carrre and de Melo 2012), consumption (Ghatak and Ghatak 1996), and investments (Rangarajan and Srivastava 2011). Additionally, the widening of the fiscal deficit has exacerbated inflationary risks (Khundrakpam and Pattanaik 2010a) and worsened trade deficits. As the impact of the prolonged fiscal deficit on the Indian economy has been net negative, it makes for an interesting case to understand the factors that have contributed to the sustained gross fiscal imbalance in the economy.

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Published On : 20th Jan, 2024

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