India rising

If the Indian economy has been growig at such a robust pace, why has government debt risen so much? World Bank economists Marina Wes, Brian Pinto and Gaobo Pang answer the question in WB Policy Research Paper 4241: India rising - faster growth, lower indebtedness

Over the past 25 years, India's economy grew at an average real rate of close to 6 percent, with growth rates in recent years accelerating to 9 percent. Yet by 2005-06, the general government debt-to-GDP ratio was 34 percentage points higher than in the 1980s. The authors examine the links between public finances and growth in the post-1991 period. They argue that the main factor in the deterioration of government debt dynamics after the mid-1990s was a reform-induced loss in trade, customs, and financial repression taxes.

Over time, these very factors plus lower entry barriers have contributed to stronger microfoundations for growth by increasing competition and hardening budget constraints for firms and financial sector institutions. The authors suggest that the impressive growth acceleration of the past few years, which is now lowering government indebtedness, can be attributed to the lagged effects of these factors, which have taken time to attain a critical mass in view of India's gradual reforms.

Similarly, the worsening of public finances during the late 1990s can be attributed to the cumulative effects of tax losses, the negative growth effects of cuts in capital expenditure that were made to offset the tax losses, and a pullback in private investment (hence, growth and taxes), a situation which is now turning around. Insufficient capital expenditures have contributed to the infrastructure gap, which is seen as a constraint especially for rapid growth in manufacturing. The authors discuss ongoing reforms in revenue mobilization and fiscal adjustment at the state level, which if successfully implemented, will result in a better alignment of public finances with growth by generating further fiscal space for infrastructure and other development spending.

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Just a note of reality here...Someone like me who worked in the Indian Financial sector few years back knows the hard fact that a very huge percentage of the Indian Financial Services Firms(even the Big guns) have grown over the past decades essentially through highly coterie based and non transparent systems ,also taking advantage of highly corrupt environments. It is easy to be impressed by the the statistics on paper, but do we really believe that the essentialy corruption based mindset in Indian Financial sector can be changed so easily, just by showing good growth numbers or new technology based systems etc..

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Great post.
I agree with you India is rising from past few years and competing other nations financially.
As many politicians working hard to make India superpower. I'm really happy to India is progressing very rapidly. As India is democratic country and each and every one has right to express themselves.
Thanks for this post.

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