Mr. Chidambaram, The Fiscal Deficit…

Question: Given the lack of fiscal prudence, do you believe that India’s recently witnessed im- pressive economic growth performance is sustainable?

Raghuram Rajan: The beauty of India’s fiscal deficit is that somehow, the consequences of the lack of fiscal prudence aren’t showing up. But, that said, we would be making a mistake not to deal with the fiscal issue on a priority basis. Part of the problem is that private investment has been at a low ebb over the last few years. As a result, the government has been able to borrow without much competi- tion. If we see signs of growth taking off and private investment starts becoming significantly higher, I think there will be more competition for funds in India. If you look at China, investment rates are 40% of GDP. That’s way beyond what we are doing. I’m not saying that we should be there; I’m just saying that when we start moving in that direction, then we’ll get a lot of competition for funds. At that point, if our domestic savings rate does not adjust appropriately and to the extent that we don’t necessarily want to depend too much on foreign inflows, I think we will have to curb our deficits or else see tremendous increase in interest rates as private investment competes. I’d say that it should be a priority to control the deficit. If nothing else, we know from the experience of many countries, that eventually it comes back to haunt you. One can’t imagine that India is a special situation where the deficit is not going to be a problem.

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Posted on July 7, 2004, in Uncategorized. Bookmark the permalink. Leave a comment.

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