**Table 6: Sustainable and Desirable Deficits In The 10th Plan Context**

||Sustainable De<br>(1)|ficit<sup>1/</sup>|Desirable Deficit<sup>2/</sup><br>(2)<br>|<br>Base year<br>(3)|
|---|---|---|---|---|
||g=6.5|g=8.0|||
|Combined|7.4|8.6|6.8|9.3|
|Center|4.4|5.2|3.6|4.9|
|States|3.0|3.4|3.2|4.5|

_Notes:_<sup>1/</sup> Table 2.21 of Tenth Plan 2/ Table 2.22 of Tenth Plan _Source:_ Tenth Five Year Plan, GoI Comparing columns (1) and (3) indicates the sizable fiscal correction needed at the level of the states to achieve sustainability even if the assumed growth of 8 percent were to materialize. Comparing columns (2) and (3) shows that an even bigger fiscal correction is needed to generate the needed public savings for investment compatible with 8 percent growth in the first place. It follows that a fiscal adjustment is needed to generate the investment needed for growth which will then lead to debt sustainability: India is not going to grow out of its debt problem without a fiscal adjustment.

# 4.2 _Impact on Private Investment_

Notwithstanding the boom in private investment after the 1991 crisis and the pick up in growth during the Eighth Plan period, growth slowed to 5.8 percent over 1997-98 to 2000-01.<sup>41</sup> Overall, growth in the 1990s was similar to that in the 1980s, the attainment of a trend rate of growth of about 6 percent. What will push the trend rate of growth to 8 percent? The Tenth Plan document notes that more public saving and investment and hence a fiscal adjustment are part of the answer, because of the direct benefits (more infrastructure) and the spin-offs (banks having more incentive to lend to the private sector, a less uncertain macroeconomic environment). Structural reforms will also help, especially addressing impediments such as small-scale industry reservations and labor regulations.<sup>42</sup> Similarly, creating a more conducive environment for private investment will also be helpful in the more competitive environment in which Indian firms find themselves today.

In this context, one must ask if private investment has been crowded out by the macro policy stance.<sup>43</sup> This is difficult to prove conclusively because the rise in the private savingsinvestment gap noted above (Table 4) may also have come about as the result of a needed period of consolidation following the private investment boom during the Eighth Plan period. But there is substantial evidence to suggest that the macro policy stance has not been the most conducive to promoting private investment.

> 41 There is some controversy about how much even of this lower growth was artificially boosted by the Fifth Pay Commission (FPC) Award.  Acharya (2001) contends that suitably adjusting  real value-added in the category “Public Administration and Defence” would lower growth to 5.4 percent.  RBI (2003a) finds a minimal impact of the FPC award.

> 42 For a detailed discussion of structural reform issues, see World Bank (2003a).

> 43 World Bank (2000) and Reynolds (2001) document a negative association between fiscal deficits and private investment, although establishing causality from high deficits to low private investment is a different matter.

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