**Table 1. Fiscal Adjustment 1985/86-2005/06**

**<u>(based on period averages)</u>**

|_% of GDP_|_Benchmark_<br>_85/86-89/90_|_8_<sup>_th_</sup>_Plan_<br>_versus_|_9_<sup>_th_</sup>_Plan_<br>_versus_<br>|_First 4 ye_<br> <br>|_ars of 10_<sup>_th_</sup>_Plan_<br>_versus_|
|---|---|---|---|---|---|
|||_85/86-89/90_|_8_<sup>_th_</sup>_Plan_|_9_<sup>_th_</sup>_Plan_|_85/86-89/90_|
|1. Revenues|19.4|-1.5|-1.0|+1.7|-0.8|
|2. Interest|3.8|+1.3|+0.6|+0.6|+2.6|
|3. Capital expenditure|6.6|-2.9|0.0|-0.3|-3.2|
|_4. Net impact (3.+2.-1.)_|--|-0.1|+1.6|-1.4|+0.2|
|5. Non-interest current exp.|18.3|-1.9|+0.8|+0.2|-0.9|
|_6. Impact on GFD (4.+5.)_|--|-2.0|+2.4|-1.2|-0.7|
|_7. Primary deficit (3.+5.-1.)_|5.4|-3.3|+1.8|-1.8|-3.3|
|_8. Revenue deficit (2.+5.-1.)_|2.6|+0.9|+2.4|-0.8|+2.5|
|Memo item: growth %/yr.|6.2|+0.3|-1.2|+1.9|+1.1|

Note: Rounding off error present. _Source_ : Authors’ calculations based on Handbook of Statistics on Indian Economy, Reserve Bank of India It is easy to see why the Ninth Plan period appears profligate compared to the Eighth: the gross fiscal deficit rose by over 2 percentage points of GDP while growth fell by over 1 percentage point. Non-interest current spending rose by about 1 percentage point of GDP. This was probably driven by the CFPC award. In spite of this increase, non-interest current spending remained 1 percentage point of GDP below the mid-1980s. Primary expenditure was cut by 4 percentage points of GDP during the Ninth Plan period compared to the mid-1980s—3 percentage points of GDP in capital spending and 1.1 percentage points in non-interest current spending. Large though this expenditure cut was, it was not enough to offset a cumulative fall in revenues of 2.5 percentage points and a rise in interest payments of 1.9 percentage points of GDP, so that the gross fiscal deficit grew to exceed the level of the mid-1980s. The rise in the deficit and slowdown in growth relative to the Eighth Plan period led to a rise in the debt-to-GDP ratio of 2.5 percentage points per year so that by 2001/02, debt-to-GDP was back to the level which prevailed at the time of the 1991 crisis.

The last two columns of Table 1 show outcomes over the first four years of the Tenth Plan period. Revenues grew substantially compared to the Ninth Plan period; but the continued upward trend in interest payments and stagnation in capital expenditure remain worrisome. Moreover, the chief symptom of the worsening expenditure composition, the revenue deficit (government dissaving) had increased by 2.5 percentage points of GDP relative to the benchmark.

# 2.1.b. Retracing the Debt-to-GDP Path

The debt-to-GDP ratio reached new highs over the first two years of the Tenth Plan period, but fell over the third and fourth year. Insights into what is driving this process can be gleaned from a standard debt decomposition exercise. This decomposition assigns changes in the debt-to-GDP ratio to primary fiscal balances, growth and interest rates, exchange rates and other factors, such as financial sector recapitalization costs and privatization. It is based on the flow version of the government’s budget identity shown in Annex 1.

In Table 2, data values over 1985/86-1989/90, the five years preceding the 1991 crisis, once again serve as a benchmark. Subsequent years are divided into the year of the BoP crisis and its aftermath, 1990/91-1991/92; the Eighth Plan period; the much-maligned Ninth Plan 7