India's Economic Reforms, 1991-2001 by V. Joshi, I. M. D. Little

By V. Joshi, I. M. D. Little

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24 See Chopra et al. (1995) . Note that this is a minimal estimate of x since the IMF's definition of the NFPS excludes State government public sector enterprises. The IMF's definition of the NFPS also excludes the Reserve Bank. We assume that its inclusion would make no difference to x, a natural assumption in the long run. STABILIZATION POLICY 29 From equation (1) we have Thus, the domestic debt ratio would be growing at about 3 per cent per year. The ultimate level of b is given by setting Δb = 0 and solving for b: That is, the implied terminal domestic debt in 1990/91 was about three-and-a-half times GDP.

7 per cent. This is primarily because interest payments have risen sharply (as a result of the higher cost of government borrowing, consequent upon interest-rate liberalization). But the reduction in subsidies has been much less than planned. Export subsidies were abolished along with 29 Note that a reduction in the Centre's primary deficit does not necessarily produce an equivalent reduction in the primary deficit of the NFPS. 5 per cent. Evidently, the Centre could not prevent the States from borrowing more.

We start from the basic identity that the deficit of the NFPS can be financed by printing money, borrowing domestically, or borrowing abroad. Each of these methods of financing, if carried to excess, can lead to a crisis. Growth of real income increases the demand for money issued by the central bank. The implied monopoly profit or ‘seignorage’ arising from this activity provides the government some scope for non-inflationary monetization of the fiscal deficit. This revenue can be further augmented by printing additional money and generating inflation.

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