Puzzles in Indian performance: deficits without disasters

Goyal, Ashima (2005): Puzzles in Indian performance: deficits without disasters. Published in: India Development Report 2004-05 (2005)

Abstract

The paper explores puzzles in Indian growth performance such as the prolonged period of below potential growth in the late nineties. Uneven investment was a major explanation. Risk aversion and adverse expectations prevented investment from rising. Since sufficient domestic and foreign savings were available to compensate for government borrowing, the high fiscal deficit did not crowd out private investment or raise risk and interest rates. A sign of the absence of excess demand was that the fiscal deficit did not lead to a current account deficit. The problem was that, partly because of structural rigidities, monetary-fiscal policy was unable to create the conditions to absorb the foreign savings made available. High volatility in nominal interest and exchange rates raised risk and amplified exogenous shocks. The second factor raising uncertainty was that exposing manufacture to international competition was delayed too long. The smooth fall in Indian nominal interest rates after 2001, and rise in infrastructure spending, succeeded in stimulating higher industrial growth by 2003, and lowering fiscal deficits. Macropolicies can stimulate growth, make it easier to undertake deep reform, and the latter can reinforce growth, allowing it to reach potential.

• Item Type: MPRA Paper
• Language: English
• Keywords: growth, open economy, twin deficits, volatility, macroeconomic policy
• Subjects: F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F43 - Economic Growth of Open Economies

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