RESPONSIVENESS OF FISCAL CONSOLIDATION TOWARDS LONG TERM GROWTH IN INDIA AND SRI LANKA

Abstract

Growth with stability is one of the goals of fiscal policy and making this growth process inclusive should be an important additional consideration. The two objectives need not be mutually exclusive. A brief investigation of the fiscal consolidation process in both the countries highlights a weak relationship between GDP growth and contractionary fiscal policy. Fiscal Consolidation process in Sri Lanka, which initially was successful in reducing the debt and deficit burden, has led to a larger decline in expenditure ratios as compared to tax revenues and tax revenues have declined despite increase in per capita income in the last 10 years. For India, initial success of fiscal consolidation process appeared to be inadequate in later years with growth slowdown; deficit and debt levels remained high while qualitative expenditure management exhibited structural rigidities. India and Sri Lanka appears to be following the same pattern of fiscal consolidation of broad reduction in almost all fiscal ratios with respect to GDP but Sri Lanka has been able to successfully maintain the capital expenditures and create a crowding in effect for private investment as compared to India. Given the country specific effects, India needs a larger expenditure restructuring.

Keywords: Fiscal consolidation, Fiscal sustainability indicators, Growth and inflation nexus, Public expenditure restructuring, Public investment.