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Fiscal deficit, crowding out, and the sustainability of economic growth: the case of the Indian economy
33 pages
Published by
Ifri - Institut français des relations...
This study examines the long-run relationship between the fiscal deficit, the crowding out of private capital formation and net exports for the Indian economy during the period from 1980-81 to 2008-09. Applying unit root tests and...
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This study examines the long-run relationship between the fiscal deficit, the crowding out of private capital formation and net exports for the Indian economy during the period from 1980-81 to 2008-09. Applying unit root tests and cointegration techniques that allow for endogenously determined structural breaks, the analysis is done separately with the gross fiscal deficit of the central government, and the combined deficits of the central and state governments. The results do not indicate any long-run relationship among the variables, despite the balance-of-payments crisis of 1990-91 and sudden jump in deficits from 1997-98 onwards. Our finding supports neither a crowding out nor a crowding in hypothesis between government spending and private investment. On the contrary, our result hints at the Ricardian Equivalence Theory on public debt, implying thereby that it does not matter whether a government finances its spending with debt or a tax increase, the effect on the total level of d
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