FISCAL POLICY OF INDIA: DYNAMICS OF GROWTH AND SUSTAINABILITY

IMRAN SALEEM*

ABSTRACT
This paper examines key factors that contributed in making fiscal policy of India to be effective,
even amidst the global financial crisis. The discussion demonstrates that adopting the strategy of
raising investment in public expenditure; the government enhanced multiplier effect which in
turn contributed in accelerating demand scenario of the country. The paper highlights the
evidences that the government has adopted the path of fiscal consolidation in order to boost
economic growth of the country. The paper also suggests an alternative model of fiscal
sustainability that may propel growth trajectory of the country and hence will prove to be a
launch pad for the future generation for improved revenue and surpluses.
KEY WORDS: Fiscal policy; fiscal consolidation; accelerating effect; multiplier effect; fiscal
sustainability
1. INTRODUCTION
Macroeconomic stabilization is an outcome of effective fiscal and monetary policies. The
policies determine the growth and development patterns of an economy. One of the main
question before any government is how to frame effective fiscal policies for short term stances as
well as to achieve fiscal sustainability. In the context of present scenario, it has become even
more important as the world has witnessed global recession. The recession has raised several
questions about underlying principles, beliefs, and assumption regulating fiscal policies of
governments of all major economies of the world. Indian economy has been restructured in order
to respond the challenges of new world economic order with its effective fiscal policy; and to
mitigate the impact of global recession and ensure fiscal stability. India needs to attain fiscal
sustainability, rather
* Faculty, Department of Commerce, Aligarh Muslim University, Aligarh, INDIA; Ex-Vice
Chancellor, Singhania University, Rajasthan, INDIA; Ex-Dean and Chairman, Faculty of
Management Sciences, Hamdard University, New Delhi, INDIA.

merely keeping growth rate high. Based on said observation, the paper endeavors to develop a
replicable model and also attempts to suggest strategies that may deepen the process of economic
restructuring and ensure long term economic growth; thus attaining fiscal sustainability. Further,
the paper elaborates an alternative model to examine the likely consequences of fiscal policy to
its sustainability. Firstly the paper discusses the overview of Indian economy along with
elaborating reasons of economic growth of India amidst global recession owing to a number of
responsible key factors. Reforms in taxation policy have also been discussed. Thereafter, it
introduces an alternative model of fiscal sustainability. This growth model suggests that growth
rate of India may be enhanced further without bothering too much about the problem of deficits.
Finally, recommendations have been listed so as to further improve fiscal policy in future course
of time; thus achieving fiscal sustainability.
2. OVERVIEW OF INDIAN ECONOMY
In the context of present scenario, India is ready to play a pivotal role in the growth of global
economy. The growth scenario of India has become autonomous; and poses great opportunity for
developing and developed economies of the world. Indian economy has witnessed an average
growth of 6-7 % per annum during last 20 years. It was 8.5 % between 2004-05 and 2007-08,
followed by Fiscal Responsibility and Budget Management Act (FRBMA) 20031. India has
experienced positive economic growth unlike other large economies of the world like US,
Russia, Japan etc. Even during financial crisis, the economy grew by 6.7% in GDP that made
India the second fastest economy of the world during 2008-09. India has registered a success
story by surpassing the average growth trends of international community and by dodging the
wide spread recessionary trends. India followed a different path. Effective fiscal policies and
macroeconomic management enabled India to face the challenge of global recession.
It has been possible because of the availability of large fiscal space, cyclical nature of fiscal
deficit, and demographic scenario of India which includes highest young population in the world,
low wage structure, second greatest propensity to consume etc. The achievement of fiscal
consolidation in post FRBMA scenario worked as a buffer against the impact of global economic
crisis.

Figure 1 demonstrates that fiscal deficit deepen in post FRBMA regime during 2008-09 (as per
budget estimate of the government)2. It has been because of accelerated tax revenue and reduced
government expenditure. In order to accelerate the demand, fiscal policies continued to be
expansionary using these measures of tax and expenditure. The government adopted
expansionary fiscal policy which is continued to budget 2009-10, 2010-11, and expected to be so
in budget of 2011-12. In 2009-10, medium term fiscal policy statement of the government
promoted continuation of the process of fiscal consolidation with rapid declining fiscal deficit to
5.5% of GDP in 2010-11. It is estimated to be 4.8% of GDP in 2011-12. Thirteenth Finance
Commission further recommended the continuation of fiscal consolidation (of Center and State)
that would lead to short term recovery along with retaining high growth momentum in the long
run. Level of fiscal deficit started to rise higher in late half of 2008-09 (Figure 1). The reason is
found to be the impact of tax cuts followed by the announcement of fiscal stimulus packages late
in the second half of 2008-09. This is not alarming sign for the government as far as interest
outlay is controlled as illustrated in Figure 1. Raising productive expenditure is desirable as it is
going to boost the demand further. Primary deficit (measured by difference between interest
outgo and fiscal deficit) is an important sign of fiscal performance. However, it is a general
practice to ignore this in budget documents. We argue that primary deficit may be of two typesproduction oriented and consumption oriented. In 2006-07 and 2007-08, the deficit showed a
surplus of Rs.7699 (actual) and Rs.28318 (RE) respectively. It was driven by consumption:
current expenditure. In 2008-09 the deficit has shown considerable increment i.e.Rs.133821
(RE)3. However, this increased expenditure was a deliberate attempt to boost the demand and
enhance productivity. As demonstrated in figure 1, both primary and fiscal deficits are rising
during 2009-10. The main qualitative difference between them is that former may or may not be
an alarming sign for countrys economy while later is going to be so in the future course of time.
Production oriented primary deficit has an accelerating effect on the economy. These findings
clearly demonstrate the reason why the economy continued to be rising even amidst global
financial crisis and rising deficits. The government consciously shifted the direction of
expenditure in terms of making long term investments like rural infrastructure development plan
even at the cost of rising deficits. Unlike 2006-07 and 2007-08, increasing primary deficits in
subsequent years was productive oriented.

2.1 Accelerator effect and Multiplier Effect

Planned capital investment by the government is linked to the growth of demand for goods and
services specially when Indian governments focuses on diverting the said expenditure towards
economically weaker section of the society that has greater propensity to consume. When
consumer demand is rising strongly, business organizations may increase investment to expand
their production capacity and to meet the extra demand. This process is known as the accelerator
effect; results in augmented revenue generation for the government in the long run. A good
example of this is the increased government expenditure in infrastructure,education, health and
rural employment under various flagship programmes like Bharat Nirman programme, Mahatma
Gandhi National Rural Employment Guarantee Act (MGNREGA) etc. Expenditure investment
in these sectors surged to record highs in recent years. For example in FY 2010-11 the
government made an investment of rupees Rs.40, 000 crore (68 billion US dollars) in
MGNREGA; that ensures a guarantee of providing at least 100 day employment to unskilled
workers, in one financial year. An initial change in aggregate demand can have a much greater
final impact on the level of equilibrium national income. This is commonly known as the
multiplier effect and it comes about because injections of demand into the circular current of
income encourage further rounds of spending. This dynamics can lead to a much more profound
effect on equilibrium national output and employment. The propensity to consume domestically
produced goods and services is directly proportional to the multiplier effect. The government can
regulate the size of the multiplier through making modifications in direct taxes. For example, a
deduction in the basic income tax rate will amplify the amount of extra income. This income can
be used in further purchasing goods and services. The multiplier process also requires that there
is sufficient spare capacity in the economy for extra output to be produced. The short-run
aggregate supply being relatively inelastic, the full multiplier effect is unlikely to occur, leading
to enhanced fiscal deficit and inflation. However, in contrast, in the long run when aggregate
supply is perfectly elastic, a rise in aggregate demand causes a large increase in national output
and hence covers fiscal deficit. In order to achieve this objective, a sound and effective taxation
policy is necessary. The government had tried to make some drastic improvements in its existing
taxation policy.
2.2 Taxation policy:

Speedy growth momentum is followed by the modification of taxation structure including

widening tax base, and enhancing the process of rationalization of taxes. Taxation policy of the
government has witnessed major changes. In the last ten years, there has been considerable
growth in direct tax collection. The collection has increased from 33.8% in 1999-2000 to 55.5 %
in 2008-09. GDP-direct tax ratio has also been improved from 2.97% in 1999-2000 to 6.36 % in
2008-09. Direct tax collection has been dramatically improved because of the following
initiatives taken by the government; _ Moderate tax rates have been structured in order to
eradicate vagueness in tax structures_ Information technology has been implemented in income
tax departments in order to deliver services like e-filing of returns, electronic tax collection
reporting, issue of refunds etc. This measure has improved functional efficiency of the
department; _ Tax administration has been improved so that deterrence levels may be enhanced
and better tax services may be provided;
Along with a discussion paper, a draft code viz., Direct Tax Code (DTC) was released on August
2009 inviting public opinions. This release has been announced in the union budget of 2009-10.
This new legislation was directed to replace Wealth Tax and current Income Tax Act; and is
based on the moderate tax rates, a wide tax base, and effective strategy of enforcement. In the
union budget of 2010-11, major changes have been carried forward including:
_ Personal Income Tax (PIT) rate structure has been rationalized in terms of income slabs so that
tax liability of taxpayers may be reduced;
_ Surcharges has been reduced on Corporate Income Tax (CIT) from 10% to 7.5%; _ The rate of
Minimum Alternate Tax (MAT) has been increased from 15% to 18% in 2010-11. This
enforcement has raised effective rate of tax; Introducing constraints on number of transactions.
These transactions are subject to Tax Deduction at Source (TDS). This practice lowers the
burden of both parties i.e. deductors and deductees. This also facilitates efficient processing of
TDS credit; _ Efforts have been made to lower the burden on small taxpayers in terms of

increasing turnover limit to Rs.6 million from Rs.4 million (beyond this turnover,business
accounts must be audited); and providing appropriate rate of taxation i.e. 8% of turnover. Tax
liabilities may also be paid as self assessment tax rather than advance tax installments etc. In
order to enhance financial discipline in the country, the government has also taken following
initiative: Reduction in total expenditure, especially consumption driven, by 0.6% of GDP (from
16.6 % in BE 2009-10 to 16.0 % in BE 2010-11); Increment in non debt receipt of capital by 0.6
% of GDP (from 0.1% in BE 2009-10 to 0.7% in BE 2010-11); _ Increased gross tax revenue by
0.4% of GDP (from 10.4 % in BE 2009-10 to 10.8% in BE 2010-11). In addition to above
changes, several other changes have been framed in the taxation policy of the government.
Indirect taxation has also been improved in terms of the following: _ An improvement in the
GDP tax ratio must be attained so as to achieve fiscal consolidation. This objective may be
achieved by widening tax base; enforcing moderate tax rates which in turn encourage deliberate
compliance; Stress has also been on the simplification of procedures so that tax payer may easily
pay due taxes_ Implementation of proposed comprehensive Goods and Services Tax (GST) of
Centre and State may avoid the problem of double taxation and cascading. This practice will
enhance the buoyancy of collection of taxes; Quick reduction in the rates of Central Excise Duty
for non petroleum products; and in the Service Tax (from 12% to 10%) is an initiative to
boostaggregate demand by mean of this fiscal catalysis; and to overcome the effects, however
mild, of global financial crisis of September 2008; Import duty on crude petroleum and refined
products of petroleum was lowered each by 5% etc. These strategic initiatives taken by the
government greatly influenced revenue collections. However, revenue collections from central
excise, customs and service tax were not satisfactory during FY 2009-10. In the budget of 201011; excise duty has been increased from 8% to 10% (followed by two reductions in December
2008 and February 2009). Duty on diesel and petrol has been raised by Re. 1 per liter. Duty on
cigarettes and other tobacco products has also been increased. In the said budget, custom duty in
petroleum products has been increased: crude petroleum-from nil to 5%; petrol and diesel from
2.5% to 7.5% etc. Service tax has not been modified i.e. 10% tax continued as applicable since
24 February 2009. These measures contribute greatly to attain fiscal consolidation. During period
of fiscal expansion in the year 2008-09, government expenditure has shown an average growth
of 19.6%. The government further raised public expenditure. The government reduced unplanned
expenditure (from 11.3 % of GDP in
BE 2009-10 to 10.6 % in BE 2010-11); while enhanced planned expenditure (from 5.3% of GDP
in BE 2009-10 to 5.4 % of GDP in BE 2010-11).

Non planned expenditure, especially consumption oriented expenditure, isestimated to be further

reduced to 15.2 % of GDP and 14.6 % of GDP in the year 2011-12 and 2012-13 respectively.
The expenditure was 16.6% of GDP in the year 2009-10 i.e. 2% of GDP is going to be reduced
in the year 2012-13. This reduction has been primarily aimed at consumption driven expenditure
which is non-productive in nature. By contrast the government is targeting productivity driven
expenditure following the path of fiscal consolidation and the philosophy of equity growth.
Expenditure in social and economic services like infrastructure, education, employment has been
considerably increased. This is a paradigm shift of government expenditure from non productive
to productive sectors so that demand may be boosted In the budget estimates (BE) o 2010-11,
there was an increment of planned expenditure by 15% while unplanned expenditure has only
increased by 6%. This strategic move of the government leads to reduction in fiscal deficit by 5.5
of GDP (against 6.9% of GDP in the year 2009-10). In order to keep fiscal deficit under control,
the government has adopted reform measures covering all dimensions of fiscal management like
subsidy, disinvestment, direct and indirect taxes, and other expenditures in the budget of 200910. The same path of fiscal consolidation had been continued in the budget of 2010-11; and
predicated to continue in the coming budget of 2011-2012. The government raised the MRP of
urea fertilizer and promoted Nutrient Based Subsidy (NBS). Under NBS regime, subsidized
nutrients can only be provided a fixed subsidy. However, MRP of these fertilizers may be
decided by the manufacturers or importers. In order to avoid the exploitation of farmers the
government may perform interventions in case the charged prices of fertilizers (non-urea) are
found to be raised than the current prices. This is in consultation with the fertilizer industry. As
India is an agriculture based economy; the optimum use of fertilizer is promoted so as to enhance
agricultural productivity. It is very important to emphasize that the government has reduced
subsidy expenditure from 2.1% of GDP in 2009-10 to 1.7 % of GDP in 2010-11. Further
reduction is estimated to be 1.6 % and 1.4% of GDP in the year 2011-12 and 2012-13
respectively (See Figure 2). This reduction is vital in order to enhance economic development.
This drastic change in the fiscal policy of Indian government results in its enhanced economic
growth. With the reforms initiated in public expenditure, the government has achieved the said
reduction in fiscal deficits to a level of 5.5% of GDP in 2010-11. It is estimated that the
introduction of Goods and Services Tax and Direct Tax Code in BE 2011-12 would further lower
fiscal deficit by 4.8% and 4.1% of GDP in FY 2011-12 and FY 2012-13 respectively. If the
sustained level of fiscal deficit is attained; then debt to GDP ratio would be considerably
decreased (from 51.1 % in RE 2009-10 to an estimation of 48.2 % in 2012-13).
3. FISCAL SUSTAINABILITY

If budget constraint stands in present value terms; then fiscal policy may be considered as
sustainable (Merih Uctum and Michael Wickens, 2000). Sustainability is one of the most
significant, challenging issues reflecting capability of the government to meet the requirement of
present without risking the future. Fiscal sustainability is essential to motivate both public and
private sector to grow; and allows governments to be autonomous to witness excellent economic
growth in the long run4. Fiscal sustainability must consider both revenue collections and
potential variation in expenditure patterns so that demand may be fulfilled in the long run. Indian
government is trying to pursue sustainability by discouraging debt accumulation that results in
increased fiscal deficit. Underlying assumption of fiscal sustainability is to balance budget in the
long run i.e. current revenue value should be equal to the current expenditure value (Cooms and
Dollery, 2004). If we assume that present net debt or net worth is zero; then intertemporal
constraint of budget may be expressed as follows:
CV_ (R - E) = 0 where (1)
CV is the current value of the sum future income streams from period p=1 in
perpetuity i.e. p=1 __ 1/ (1+r) p
R= the future stream of government revenue: R p
E= the future stream of government expenditure: E p
The necessary and sufficient condition for attaining fiscal sustainability is that as
period p goes to infinity; expected debt-GDP ratio comes down to zero. If we bifurcate the
constraints of intertemporal budget between one generation, say, ER 1, and another generation,
say, ER 2, we obtain:
CV_ (R1 - E1) + CV_ (R2 E2) = 0 (2)
Where R1 and R2 implies revenue of first and second generation respectively;
E1 and E2 represent the expenditure of first generation and second generation respectively. In
pre economic reform, India ran a higher deficit i.e. R1 - E1 < 0. Thats why; in post economic
reform the government had to raise taxes and reduces total expenditure. It means that fiscal
burden is carried forward to post economic reform in India. However, we have emphasized that
the government has raised expenditure as a means to boost demand thus raising economic
development; and has generated revenues 9 in the form of direct, indirect taxes etc. This model is
based on Generational Model proposed by Auerbach, A. and L. Kotlikoff (1999).
By contrast we argue that the Generational Model is not well directed as neither balancing
budget in the long run is the real issue nor deficits are burden on fiscal sustainability. In order to
justify this argument, Equation 1 may be restructured as

follows:
CV_R (Ec + Ei) = 0 (3)
where E= Ec + Ei
Ec is the government expenditure in consumption while Ei represents governments investment
driven expenditure. In order to justify the point further Equation 3 can be rewritten as:
CV_R (Ec /1-i + Ei /1+g+t) _ 0 (4)
Where i is the rate of interest, g represent growth rate, and t implies tax
Hypothetical example of Equation 4 may be described as follows:Revenue Consumption
Expenditure Ec /(1-i) Investment Expenditure Ei /(1+g+t) Total (E)
10,000 9000 10000 1000 833.33 10833.33 10,000 7000 7777.78 3000 2500
10277.78 10,000 5000 5555.55 5000 4166.66 9722.22 10,000 3000 3333.33 7000 5833.33
9166.66 10,000 1000 1111.11 9000
7500 8611.11 For all three variables i.e. i, g, and t, percentage is assumed to be 10%.
Equation 4 demonstrates that the governments total expenditure which is equal to
total revenue of the government in absolute terms, may not be the same when consumption
expenditure is added with the cost of interest that nation will have to bear while investment
expenditure is discounted with potential growth and potentially enhanced tax revenue. Despite
showing fiscal balance in the short run the example derivates that if consumption expenditure is
diverted towards investment expenditure, than in place of deficit financing being a burden-shift
on next generation may prove to be a spring board with augmented economic capacity and will
propel the growth trajectory for augmented revenue and surpluses. Hence, this alternative model
of sustainable growth promotes positive implications of primary deficits if well directed.
The acceleration effect shown in above figure also reasserts the importance of
government investment expenditure as it enhances the tax and revenue base given accelerated
investment and multiplier effect in the economy. Thus, Indias fiscal policy is well directed and
shall cover the fiscal deficit concern in the long run.Equation 4 also demonstrates that the
government total expenditure may exceed from total revenue. Despite showing fiscal imbalance
in the short run the equation suggests that directed government expenditure in investment
activities will propel the growth trajectory and hence will prove to a spring board for the next
generation for augmented revenue and surpluses. Hence, this alternative model of sustainable
growth promotes positive implication of primary deficits. However, rising gap between primary
deficit and fiscal deficit is an alarming thing for the economy (See Figure 1). Thats why; the
government should formulate such fiscal strategy that may control the rise of fiscal deficit.

3.1 Factors affecting fiscal sustainability

There are factors that put considerable pressure on fiscal sustainability; and pose challenge for
the government to tackle this pressure so as to remain intact on the path of Enhanced revenue
base in long run Enhanced Government investment expenditure Price=Taxes&Revenfiscal
sustainability. Some of the important factors, uniquely attributed to India, are as follows:
I. Rural Population:
Several factors have contributed to the continuous growth of the India. India is an agriculture
based economy. Hence, the government stresses to promote agriculture in order to sustain its
economic growth. Along with aiming to keep its GDP high; one of themost significant factor that
the government has taken into account is its rural population that contributes 70% of whole
population of the country i.e. 790 million citizens resides in around 0.63 million villages i.e. two
third of the population. There are 20,000 nonurban areas residing 15% rural population; while
villages having population of 1000- 5000 citizens resides 63% rural population. Remaining 22%
population comprises less than 1000 citizens who lives in 3, 90,000 villages. 65% population of
the country directly belongs to agriculture. 40% large industry like sugar, textile, paper, fertilizer
depends on agriculture. The rural consumption level has increased dramatically because of rise in
per capita income as a result of effective food grain production. The production rose to a level of
230 million tones (MT) in 2008. The rise in minimum support price (MSP) of paddy and wheat
also indicates the prosperity of farmers. Moreover, farmers also have advantage of subsidized
loans by the government which further relieved the financial burden of farmers. Introduction of
credit cards viz., Kisan Credit Cards in FY 1998-99 played pivotal role in improving the
financial conditions of farmers. Introduction of this card is one of the most significant initiatives
to improve accessibility of farmers to bank credit, easy delivery of credit mechanism and to
enhance convenience in taking loans With increment in per capita income, there is an estimation
of shifting near about 111 million people from below poverty line to higher middle classes. It is
good sign for growth in rural areas. Rural people are consuming about 60% goods produced in
the country. 41% Indian population belongs to middle class; and contributes in 58% of
disposable income for consumption. In the next 20 years, Indian rural market will be bigger than
whole consumer markets of countries like Canada or South Korea.Present demographic scenario
of India pressurizes government to meet therequirement of the country and to enhance
sustainable growth in the time to come.
ii. Increased Consumption Level:

According to Indian Management Associations report, India has got highest consumption
(personal level) as a percentage of GDP in whole Asia as compared to other Asian countries.
Near about 72% rural population contributes half of the GDP of India (ETIG 2002-03). That's
why; the government has initiated a five year time boundprogramme viz., Bharat Nirman
programme in order to improve rural infrastructure. This improvement leads to rising
consumption of rural people which in turn thrust demand of consumable products; raises
standards of living; per capita income etc. This is being considered as one of the greatest
contributors to the growth of the economy. It is one of the most strategic initiatives taken by the
Indian government. During FY 2006-07, the budget of the programme was Rs.113 (2.5 billion
US dollar) which is 0.3% of GDP of that year; while the budget rose to Rs.391 billion during FY
2009-10. This investment has raised the governments planned expenditure. The government
primarily aims at boosting the household consumption. This is revenue based expenditure.
iii. Rising young and working women population:
The second factor that is uniquely attributed to India is rapid increase in young population (aged
between 15-49 years). Near about 30% population of India consist of young people. The
population is estimated to be increased by 53.0% by 2020 and 46.5 % by 2050. Near about 700
million people are under 30 years of age. This is happening for the first in the history of the
country that the growth is much higher than other developed and developing countries5.
Working women population is also increasing rapidly. India also consists of largest working
population in the world. India used to have stronger demand than supply. Before 1991, it was
supply constraint economy; and consists of chronic access demand situation. In present scenario,
it does not sound justified as the government has already taken strategic initiative in order to
meet and boost the demand of the country. Investing in improving rural and urban infrastructure
is a part of this strategic move. In order to attain fiscal sustainability, the government has to
consider these factors seriously.
3.2 Recommendations

In order to improve the fiscal policy even further, the government must address following issues
so that sustainability may be achieved in the long run: The government has performed
modifications in the taxation policy. Tax collections have been considerably increased,
especially from direct taxes. The collection may be further augmented by the implementation of
above said Direct Tax Code (DTC) in 1st April 2012. FY 2011-12 would be the last year of
present tax regime. Similarly indirect tax collection, which is currently not satisfactory, may be
increased by the timely implementation of Goods and Services Tax (GST) and Direct Tax Code
(DTC) so that government revenue may be augmented; Financial assistance in the form of Kisan
Credit Cards has reached only to 7299381 farmers; and assistance of near about Rs.4, 86,334
million has been provided. Hence, the government need to enhance effective governance so as to
ensure proper reach of funds to farmers and weaker sections of the society; One of the most
important challenge before the government is: how to bring back wealth accumulated in overseas
banks. Huge amount of taxes may be recovered through this unused, blocked, black money. This
recovery maycontribute in the governments strategic move: to reduce fiscal deficit in the future
course of time. In order to consider this issue India has amended Prevention of Money
Laundering Act (PMLA) in 2009. The government has implemented several amnesty schemes to
deal with this problem. Recently, claims have been by the finance minister to formulate five
pronged strategy so that global crusade against black money may be joined; resulting in the
creation of appropriate framework of legislation. The initiative consists of making tax offices in
overseas, making bilateral arrangements with tax treaty partners and other countries so that
information may be exchanged etc. But the real issue is still the implementation of this strategy
that really matters; Underground economy is still another challenge before the government.
Bribery and corruption seems to dominate the country. These measure retards, to a larger extent,
the path of fiscal consolidation; Instead of concerning only about accelerating growth rates
towards double digit; the government should shift its orientation towards promoting sustainable
economic growth; and must formulate fiscal policies accordingly.
4. CONCLUSION:

Several economies of the world including India are focusing on the reduction of debt and deficit
in order to make their fiscal policy more effective. Empirical studies have demonstrated that
India has been successful in making these attempts. The underlying reason of this success has
been found to be raising public expenditure by the government in subsequent years. The
government of India has been able to so because of a number of factors uniquely attributed to
India. Evidences suggest that India has got second highest propensity to consume domestically
produced goods and services which in turn has enhanced the multiplier effect. The later can be
further improved by makinmodifications in direct taxes and to enhance aggregate demand in the
long run that may control fiscal deficit. An alternative model of fiscal sustainability has been
suggested in place of Generational Model that emphasizes to determine suitable necessary and
sufficient conditions for fiscal policies to be sustainable in the long run. By mean of a
hypothetical example these conditions have been applied to the fiscal stances of India and its
planned position in the future course of time. Central to our argument is the basic issue of
formulating effective fiscal strategy to be adopted by the government in terms of making and
sustaining investment in the long run. We argue that the direction of the policy must be towards
making productive investment in the public sector, despite the fact that deficits may rise higher.
This investment is driven by above mentioned accelerator and multiplier effect. However,
reallocation of public expenditure is neither sufficient nor necessary condition for making
effective fiscal consolidation and sustainability. The government must emphasize increasing
revenues by mean of direct, indirect taxes etc. India needs to adopt further policy reforms so that
fiscal sustainability may be ensured. Along with ensuring effective governance, the government
must also ensure speedy implementation of the fiscal reforms, which is the real issue, so that
sustainable growth may be augmented even further. Following underlying philosophy of
equitable growth, the government is already on the path of fiscal consolidation. In order to
deepen sustainable growth further, India needs to consider recommendations described above so
as to ensure fiscal sustainability by implementing suggested alternative model. It is argued that
the implementation of this model may push great buoyancy on global economy through Indian
channel. Indias growth runs with the symbiotic dynamics of global economic growth. This is the
time when India has to play key role in the global economy. Although findings of the paper are
justifiable on many grounds, further research may be conducted to address crucial issues like
how to eradicate underground economy; political corruption; how to ensure prompt
implementation of fiscal reforms. These issues may impedes or even threaten the path of fiscal
sustainability.

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http://indiabudget.nic.in
http://tutor2u.net/economics/revision-notes/a2-macro-theories-of-economic-growth.html
http://www.nrega.nic.in/netnrega/home.aspx http://indiabudget.nic.in/es198990/1%20The%20Economic%20Situation%20in%201989-90.pdf
http://indiabudget.nic.in/es2001-02/chapt2002/chap22.pdf NOTES
1 In order to tackle with fiscal imbalances witnessed in 2000, the government introduced a bill
viz., Fiscal
Responsibility and Budget Management (FRBM) Bill in December 2000. The bill was passed by
both houses of
parliament in the year 2003; and FRBM Act was enacted in order to make fiscal reform.
2 See also, www.indiabudget.nic.in.
3 See also, www.indiabudget.nic.in.
4 See also, Jeffrey I. Chapman, State and Local Fiscal Sustainability: The Challenges, Public
Administration
Review, December 2008 (Arizona State University) 117.
5 MGI India Consumer Demand Model, v.1.0.