india rising

If the Indian economy has been growing 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 latest World Bank Policy Research Paper 4241. Here is the astract of the paper:

Over the past 25 years, India's economy grew at an average real rate of close to 6 percent, withgrowth rates in recent years accelerating to 9 percent. Yet, by 2005/06, the general governmentdebt-to-GDP ratio was 34 percentage points higher than in the 1980s. We examine the linksbetween the public finances and growth in the post-1991 period. We argue that the main factor inthe deterioration of government debt dynamics after the mid-1990s was a reform-induced loss intrade, customs and financial repression taxes; over time, these very factors plus lower entrybarriers have contributed to stronger microfoundations for growth by increasing competition andhardening budget constraints for firms and financial sector institutions. We suggest that theimpressive growth acceleration of the past few years, which is now lowering governmentindebtedness, can be attributed to the lagged effects of these factors, which have taken time toattain a critical mass in view of India's gradual reforms. Similarly, the worsening of the publicfinances during the late 1990s can be attributed to the cumulative effects of the tax losses, thenegative growth effects of cuts in capital expenditure that were made to offset the tax losses and apullback 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 aconstraint, especially for rapid growth in manufacturing. We discuss the ongoing reforms inrevenue 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 spacefor infrastructure and other development spending.