The fiscal indicators shown in Table 1 depict a perceptible deterioration during the Ninth Plan period. Gross fiscal deficits returned to the levels of the mid-1980s after being cut sizably during the Eighth Plan period. Revenue deficits (current spending minus revenues, note that privatization proceeds are treated as financing, not as revenue) doubled from less than 3 percent of GDP in the second half of the 1980s to 6 percent during the Ninth Plan period. Primary deficits were reduced substantially during the Eighth Plan period relative to the second half of the 1980s; but then rose during the Ninth Plan period. Comparing the Ninth Plan period with the mid-1980s, the fact that the primary deficit was much smaller while the revenue deficit was much larger and the gross fiscal deficit about the same can only mean that rising interest payments displaced capital expenditure. General government debt fell from 71 percent of GDP at the end of 1989/90 to 65 percent at the end of the Eighth Plan period but then rose by 15 percentage points to the end of the Ninth Plan, and another five percentage points the following year.

**<u>Table 1: Key Macroeconomic Indicators</u>**

|% of GDP<br>(unless otherwise defined)|Pre-crisis<br>period<br>85/86 - 89/90|Crisis<br>90/91|8th Plan<br>avg.|9th Plan<br>avg.|02/03<br>RE|
|---|---|---|---|---|---|
|**Fiscal and Debt**||||||
|Gross fiscal deficit<sup>1/</sup>|9.0|9.3|7.2|9.3|10.3|
|Revenue deficit<sup>1/</sup>|2.8|4.0|3.6|6.1|6.8|
|Primary deficit<sup>1/</sup>|5.3|4.8|2.1|3.5|3.7|
|Debt outstanding<sup>2/</sup>|70.6|72.5|65.1|79.8|84.9|
|**External Vulnerability**||||||
|Forex reserves $ bn<sup>2/</sup>|4.0|5.8|26.4|54.0|75.4|
|M3/Forex Reserves %<sup>2/</sup>|3694|2329|733|568|469|
|Short-term external debt<sup>3/</sup>/Forex reserves %<sup>2/</sup>|365|276|33|16|18|
|Current account balance|-2.2|-3.1|-1.2|-0.7|1.0|
|**Real GDP growth %**|5.9|5.6|7.1|5.5|4.4|
|Notes :||||||

1/ For the general government. The figures for 2002/03 are revised estimates for central govt. and staff estimates for state governments. 2/ For end of last fiscal year in the period.

3/ External debt with original maturity less than a year plus all long-term debt falling due over the next one year. Source: Government budget documents, Handbook of Statistics on Indian Economy and Annual Report 2001-02, Staff estimates In contrast, external vulnerability indicators strengthened impressively. Foreign exchange reserves steadily built up after the 1991 crisis with a jump of $21 billion in 2002/03, and now surpass $95 billion. The table also shows two standard measures of international liquidity: broad money, or M3, divided by foreign exchange reserves; and short-term external debt divided by reserves.<sup>10,11</sup> M3 was over 3,600 percent, and short-term external debt 365 percent of reserves the year before the BOP crisis. The first liquidity measure fell to less than 500 percent by March 31, 2003, and the second to a safe 18 percent. Both measures peaked at or around the time of the 1991 crisis and have fallen dramatically since. Their behavior explains why India is not on the verge of another BOP crisis in spite of the deterioration in the fiscal fundamentals.

> 10 M3 is defined as currency with the public, demand deposits with banks, other deposits with Reserve Bank of India, post office savings bank deposits and time deposits with banks.

> 11 IMF (2000) identifies the ratio of short term external debt to reserves as a key indicator of vulnerability to an exchange crisis.  Chang and Velasco (1998) identify international liquidity as a key factor in the East Asian crisis.

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