Capital illusions about Indian`s revenue deficit

Abstract

There is a broad consensus that India's fiscal situation worsened over the 1990s due to a sharp rise in the revenue deficit, which in turn has raised interest rates, crowded out private investment and hindered growth. This article critiques this consensus view. It shows, using Domar arithrnetic, that a rise in the fiscal deficit and revenue deficit can occur due to the casing of financial repression that leads to higher interest rates and thus higher interest payments on government debt, but simultaneously stimulates growth by lowering private borrowing rates.