Skip to main content

Advertisement

SpringerLink
Log in

Fiscal Consolidation, Growth and Employment: International Evidence and Implications for India

  • Article
  • Published:
The Indian Journal of Labour Economics Aims and scope Submit manuscript

Abstract

The paper argues that many national governments, including the one in India, focus on insufficiently robust point estimates pertaining to specific debt/deficit thresholds that create a fiscal consolidation bias. This is costly in terms of output and employment losses. The paper points out that labour market reforms to support fiscal consolidation are often advocated by international agencies, but one should not ignore the high short-run costs of such reforms. These lessons of international experience are highly pertinent to India as it is poised to implement a new fiscal framework. The paper emphasizes that India faces the major challenge of providing productive and durable jobs for its burgeoning work force while ensuring improved social indicators. Adequate and sustainable financing of such critical development needs ought to be at the centre of any fiscal framework.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Source: Adam and Bevan (2005)

Fig. 2

Source: FRBM Review Committee (2017)

Fig. 3

Source: FRBM Review Committee (2017)

Fig. 4

Source: https://fred.stlouisfed.org/series/DEBTTLINA188A

Similar content being viewed by others

Notes

  1. Ray and Schmitz (2016). This evaluation was undertaken under the supervision of the author.

  2. As reviewed in Islam and Kucera (2014).

  3. The study is based on 44 developed and developing countries.

  4. The evidence is reviewed in Islam and Hengge (Islam).

  5. Chowdhury and Islam (op.cit).

  6. See Islam and Chowdhury (2012).

  7. Hory is based on a sample of 48 emerging and advanced economies for the 1990–2013 period. See Hory (2016). Kraay is based on a sample of 102 developing countries using lending data from creditor countries to covering observations that go back to the 1980 s. See Kraay (2014).

  8. Estevao and Samake (2013).

  9. Matheson and Pereira (2016). Note that historical data preceding the global financial crisis of 2007–2009 suggest that fiscal multipliers in Brazil are approximately 0.5.

  10. IMF (2008). See Estevao and Samake (op.cit). Contrarian views on negative fiscal multipliers are offered in Mason and Jayadev (2013).

  11. ‘A fiscal rule is a long-lasting constraint on fiscal policy through numerical limits on budgetary aggregates during the budget cycle.’ (Lledo et al. 2017, p. 8).

  12. Lledo et al. (2017).

  13. IMF (2017a).

  14. A good review of India’s fiscal framework and how it should move ahead can be found in Akun et al (2017).

  15. Lledo et al (2017b, p. 37).

  16. FRBM Review Committee (2017).

  17. For a critique of the Indian government’s fiscal policy statement, see Chakraborty and Chakraborty (2018). The authors contend that the central or (‘Union’) government is preoccupied with ‘spending less’ but the key challenge is to re-examine ‘…the way the government spends’.

  18. IMF (2017b, p. 13).

  19. Lledo et al (2017b).

  20. IMF (2017b, p. 16).

  21. Financial Times (2017).

  22. Reserve Bank of India (2017).

  23. The dissenting note is incorporated in the FRBM Review Committee report and was issued by Arvind Subramanium, the Chief Economic Adviser.

  24. Asonuma (2016).

  25. IMF (2017b, p. 15).

  26. An exasperated Chief Economic Adviser proclaimed: ‘why do we take these rating analysts seriously at all’?

  27. Debrun (2017).

  28. Beetsma and Debrun (2016).

  29. Tapsoba (2013).

  30. Tapsoba (2013: 12, 19).

  31. Bhanumurthy et al. (2015).

  32. Menukulasi (2016).

  33. See Serven (2007), Easterly et al. (2007). As authors observe: ‘Fiscal adjustment becomes like walking up the down escalator when growth-promoting spending is cut so much as to lower growth and thus the present value of future tax revenues to a degree that more than offsets the improvement in the cash deficit’.

  34. Basu (2017).

  35. Reserve Bank of India (2017).

  36. See Chakraborty (2016), which is one of the most comprehensive empirical assessment of fiscal policy issues in India.

  37. Islam (2017).

  38. IMF (2017c).

  39. Anand and Khera (2016), the authors note that this can be mitigated by focusing on product market reforms.

  40. IMF (2017c).

  41. Hallward-Driemeier and Pritchett (2015).

  42. World Bank (2013).

  43. Easterly (2013) provides evidence on the impact of growth slowdowns on a government’s fiscal position in both developed and developing countries.

References

  • Adam, C.S., and D.L. Bevan. 2005. Fiscal Deficits and Growth in Developing Countries. Journal of Public Economics 89: 571–597.

    Article  Google Scholar 

  • Akun, C., et al. 2017. Fiscal Responsibility and Budget Management Act in India: A Review and Recommendations for Reform. ADB South Asia Working Paper Series, No. 52, July.

  • Alesina, A. 2010. Fiscal Adjustments: Lessons from Recent History. Prepared for the Ecofin meeting in Madrid, April, 15.

  • Alesina, A., and S. Ardagna. 1998. Tales of Fiscal Adjustment. Economic Policy 13(27): 489–585.

    Article  Google Scholar 

  • Anand, R., and P. Khera. 2016. Macroeconomic Impact of Product and Labor Market Reforms on Informality and Unemployment in India. IMF Working Paper No. 16.

  • Asonuma, T. 2016. Serial Sovereign Defaults ad Debt Restructurings. IMF Working Paper No. 66.

  • Ball, L., et al. 2013. The Distributional Effects of Fiscal Austerity. UN-DESA Working Paper No. 129, New York, United Nations.

  • Basu, K. 2017. Reviving India’s Economy. Project Syndicate, September 19. https://www.project-syndicate.org/commentary/reversing-india-growth-slowdown-by-kaushik-basu-2017-09; http://www.thehindubusinessline.com/economy/i-do-see-a-case-for-fiscal-stimulus-says-niti-aayogs-rajiv-kumar/article9909609.ece.

  • Beetsma, R., and X. Debrun. 2016. Fiscal Councils: Rationale and Effectiveness. IMP Working Paper No. 86.

  • Bhanumurthy, N., S. Bose, and P.D. Adhikari. 2015. Targeting Debts and Deficits in India, October. http://nipfp.org.in/media/medialibrary/2015/10/OP_2015_20.pdf.

  • Bose, S., and N.R. Bhanumurthy. 2015. Fiscal Multipliers for India. Margin—The Journal of Applied Economic Research 9(4): 379–401.

    Article  Google Scholar 

  • Bova, E., et al. 2014. A Fiscal Job’? An Analysis of Fiscal Policy and the Labor Market. IMF Working Paper No. 216.

  • Chakraborty, L. 2016. Fiscal Consolidation, Budget Deficits and the Macro-Economy. New Delhi: Sage.

    Google Scholar 

  • Chakraborty, P., and L. Chakraborty. 2018. Budget 2018–2019: Time to Recast Union Government Expenditure Needs. Economic and Political Weekly 53(9), March.https://www.indiabudget.gov.in/ub2018-19/frbm/frbm2.pdf.

  • Chowdhury, A., and I. Islam. 2014. Fiscal Consolidation: Issues and Evidence, in Islam and Kucera (op.cit).

  • Cobham, D. 2016. The Weakness of the Academic Case for Austerity. In German Macro: How it is Different and Why it Matters, ed. G. Bratsiositis and D. Cobham. Brussels: European Policy Centre.

    Google Scholar 

  • Debrun, X. 2017. The Fiscal Council Dataset: A Primer to the 2016 Vintage. IMF.

  • Dermott, C.J., and R. Wescott. 1996. Fiscal Reforms that Work. Economic Issues, No. 4.

  • Easterly, W. 2004. The Widening Gyre: The Dynamics of Rising Public Debt and Falling Growth. Paper Presented at IMF/NIPFP Conference on Fiscal Policy in India, New Delhi, India, January 16–17.

  • Easterly, W. 2013. The Role of Growth Slowdowns and Forecast Errors in Public Debt Crises. In Fiscal Policy After the Financial Crisis, ed. A. Alesina and F. Giavazzi. Chicago: University of Chicago Press.

    Google Scholar 

  • Easterly, W., T.C. Irwin, and L. Serven. 2007. Walking Up the Down Escalator: Public Investment and Fiscal Stability. World Bank Policy Research Working Paper No. 4158.

  • Estevao, M., and I. Samake. 2013. The Economic Effects of Fiscal Consolidation with Debt Feedback. IMF Working Paper No. 136.

  • Financial Times. 2017. 25 October, 2017. https://qell.co.uk/india-state-banks-tiffin-doubt-recapitalise/.

  • FRBM Review Committee. 2017. Responsible Growth: A Debt and Fiscal Framework for 21st Century India, January, New Delhi.

  • Government of India. Medium-Term Fiscal Policy Statement, 2018–2019. https://www.indiabudget.gov.in/ub2018-19/frbm/frbm3.pdf. Accessed 30 Aug 2018.

  • Hallward-Driemeier, M., and L. Pritchett. 2015. How Business is Done in the Developing World: Deals Versus Rules. Journal of Economic Perspectives 29(30): 121–140.

    Article  Google Scholar 

  • Hory, M.-P. 2016. Fiscal Multipliers in Emerging Economies: Can we Learn Something from Advanced Economies? International Economics 146: 59–84.

    Article  Google Scholar 

  • IMF. 2008. World Economic Outlook, October, Chapter 5.

  • IMF. 2015. Fiscal Policy and Long-Term Growth, April 20.

  • IMF. 2016. World Economic Outlook, April.

  • IMF. 2017a. Tackling Inequality. IMF Fiscal Monitor, October.

  • IMF. 2017b. India: Selected Issues, Country Report No. 17.

  • IMF. 2017c. India: Selected Issues, February.

  • Islam, I. 2014. The Rise and Decline of the Fiscal Austerity Doctrine: Implications for the Euro Area Crisis. In The Governance of Policy Reforms in Europe, ed. K. Papadakis and G. Youcef. Geneva: ILO.

    Google Scholar 

  • Islam, I. 2017. Comparing Development indicators: Revisiting the Sen-Dreze thesis on India’s ‘Uncertain Glory’, October 10. https://blogs.griffith.edu.au/asiainsights/comparing-development-indicators-revisiting-the-sen-dreze-thesis-of-indias-uncertain-glory/.

  • Islam, I., and A. Chowdhury. 2012. Revisiting the Evidence on Fiscal Austerity: Alesina’s Hour? http://voxeu.org/debates/commentaries/revisiting-evidence-expansionary-fiscal-austerity-alesina-s-hour. Accessed 28 Feb 2012.

  • Islam, I., and M. Hengge. 2012. Fiscal Austerity, Borrowing Costs and the Eurozone Economies, July 12, Social Europe.

  • Islam, I., and D. Kucera (eds.). 2014. Beyond Macroeconomic Stability: Structural Transformation and Inclusive Development. Geneva and London: ILO and Palgrave Macmillan.

    Google Scholar 

  • Jain, R., and P. Kumar. 2013. Size of Government Expenditure Multipliers in India: A Structural VAR Analysis. RBI, Department of Economic and Policy Research, Working Paper No. 7, September.

  • Kraay, A. 2014. Government Spending Multipliers in Developing Countries: Evidence from Lending by Official Creditors. American Economic Journal: Macroeconomics 6(4): 170–208.

    Google Scholar 

  • Lledo, V., et al. 2017a. Fiscal Rules at a Glance, March, IMF, p. 8.

  • Lledo, V., et al. 2017b. IMF: Fiscal Rules at a Glance.

  • Mason, J.W., and A. Jayadev. 2013. How the New Consensus in Macroeconomics Let Austerity Lose all the Battles and Still Win the War. Economic and Political Weekly 48(2): 102–111.

    Google Scholar 

  • Matheson, T., and J. Pereira. 2016. Fiscal Multipliers in Brazil. IMF Working Paper, No. 79.

  • Menukulasi, G. 2016. Are Fiscal Rules a Recipe for Growth in Developing Economies? PhD thesis, University of Delaware, Fall.

  • OECD. 2012. Looking to 2060: A Global Vision of Long-Term Growth. OECD Economics Department Policy Notes No. 15, November.

  • OECD. 2015. Achieving Prudent Debt Targets Using Fiscal Rules. Economics Department Policy Note No. 28, July.

  • Ostry, J. et al. 2010. Fiscal Space. IMF Staff Position Paper, SPN/10/11, 1 September.

    Article  Google Scholar 

  • Ostry, J., P. Loungani, and D. Furceri. 2016. Neoliberalism: Oversold? Finance and Development, June.

  • Ranenberg, A. 2015. The Consequences of Europe’s Fiscal Consolidation. World Economic Forum, November 16.

  • Ray, N., and L. Schmitz. 2016. The IMF and Social Dimensions of Growth: A Content Analysis of Recent Article IV Surveillance Reports 2014–2015. Employment Working Paper No. 202, ILO, Geneva.

  • Ray, N., A. Velasquez, and I. Islam. 2015. Fiscal Rules, Growth and Employment: A Developing Country Perspective. Employment Working Paper No. 184, ILO, Geneva.

  • Reinhart, C., and K. Rogoff. 2010. Growth in a Time of Debt. American Economic Review 100(2): 573–577.

    Article  Google Scholar 

  • Reserve Bank of India. 2017. Monetary Policy Report, October.

  • Serven, L. 2007. Fiscal Rules, Public Investment and Growth. World Bank Policy Research Working Paper No. 4382.

  • Tapsoba, S. 2013. Options and Strategies for Fiscal Consolidation in India. IMF Working Paper No. 127.

  • The Economist. 2010. Fiscal Tightening and Growth, 31 March.

  • Willamson, J. 1990. What Washington Means by Policy Reform. In Latin American Adjustment: How Much Has Happened, ed. J. Williamson. Washington, DC: Institute for International Economics.

    Google Scholar 

  • World Bank. 2017. Doing Business: Reforming for Creating Jobs, 13. Washington, DC: World Bank.

    Google Scholar 

  • Wren-Lewis, S. 2015. The Austerity Con. London Review of Books, 19 February.

Download references

Acknowledgements

The author gratefully acknowledges helpful and incisive comments received from Sher Verick and Rizwanul Islam. The standard disclaimer applies: the author bears sole responsibility for any remaining errors and omissions.

Author information

Authors and Affiliations

  1. Griffith Asia Institute, Griffith University, Nathan campus, Brisbane, Australia

    Iyanatul Islam

Authors
  1. Iyanatul Islam
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Iyanatul Islam.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Islam, I. Fiscal Consolidation, Growth and Employment: International Evidence and Implications for India. Ind. J. Labour Econ. 61, 105–130 (2018). https://doi.org/10.1007/s41027-018-0131-6

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s41027-018-0131-6

Keywords

Search

Navigation