Fiscal Policy in India (An overview 1991-2011)

Abstract

This essay examines the trajectory of India’s fiscal policy with a focus on historical trends, fiscal discipline frameworks, and fiscal responses to the global financial crisis and subsequent return to a fiscal consolidation path. The initial years of India’s planned development strategy were characterized by a conservative fiscal policy whereby deficits were kept under control. The tax system was geared to transfer resources from the private sector to fund the large public sector driven industrialization process and also cover social welfare schemes.
The global financial crisis tested the fiscal policy framework and it responded with counter-cyclical measures including tax cuts and increases in expenditures. The post-crisis recovery of the Indian economy is witnessing a correction of the fiscal policy path towards a regime of prudence. In the future, the focus would probably be on bringing in new tax reforms and better targeting of social expenditures.

The paper is organized into seven sections. Section 1 is introductory in nature, Section 2 clarifies certain basic concepts and Section 3 outlines India’s fiscal policy architecture. Section 4 delineates the fiscal policy developments from the period of planned development in the 1950s to the eve of the country’s balance of payments crisis in 1991. Section 5 describes developments following economic liberalization and the move towards fiscal consolidation till the global financial crisis in 2008. Section 6 traces the role of fiscal policy during the crisis and post-crisis recovery of the Indian economy. Section 7 concludes.

2. Basic concepts

At the outset, it is important to clarify certain basic concepts. The most elementary is perhaps the difference between revenue and capital flows, be they receipts or expenditures. While there are various complex legal and formal definitions for these ideas, presenting some simplified and stylized conceptual