New issues in Indian macro policy.

c Central gross fiscal deficit The top left graph shows the central gross fiscal deficit expressed
as percent of GDP. A fiscal consolidation of three percentage points has come about: from
7% in 1998-99 to 4% in 2006-07. This corresponds to an average improvement of 0.37
percentage points a year over eight years. It now appears likely that the FRBM target of
a central gross fiscal deficit of 3% in 2008-09 will be achieved, though achieving the target
of a revenue deficit of zero appears daunting.

• Extent of pre-emption of resources The right hand top graph expresses the central gross
fiscal deficit as percent of non-government saving. This peaked at near 50% in the late 1980s
and has dropped to unprecedentedly low levels, reflecting a combination of a reduction in
the gross fiscal deficit and an expansion of savings of the private sector.

• Debt/GDP ratio The left hand bottom graph shows total central government liabilities as
percent of GDP. There was a worrisome period from 1996-97 to 2002-03 where this ratio
rose from 53.6% to 69%. However, in the following years, it has dropped slightly to 67.75%
in 2006-07. The right hand bottom graph shows the ratio of internal debt to GDP. This
is particularly relevant given that the central government’s offshore borrowing is generally
at concessional terms and does not directly fund domestic deficits. This shows a somewhat
more pronounced fiscal consolidation.

Turning to the consolidated deficit of the centre and states, from a peak value of 9.63%
of GDP in 2001-02, this had dropped to 6.36% of GDP in 2006-07: a gain of 3.27 percentage
points in five years or an average pace of improvement of 0.65 percent of GDP per year.
The gross fiscal deficit of the states alone dropped from an average of 4.3% in 2000-2004
to 2.1% in 2007-08 (budgeted) (Kishore and Prasad, 2007).

These changes constitute a transformation of Indian public finance and hence the
macroeconomic environment.

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