Willem H. Buiter and Urjit R. Patel1
The substantive content of this paper may be located in India, but the origins of the methodology applied in it can be traced to a spell by one of the authors as a visiting scholar in Vito Tanzi’s Fiscal Affairs Department at the IMF. 2 This reference to the Fiscal Affairs Department as ‘Vito’s Department’ is quite deliberate. Vito Tanzi combines a formidable scholarly reputation (rare among heads of department in large international organizations) with managerial, administrative and political skills (most rare among scholars everywhere). This has enabled his Fiscal Affairs Department, short-term visitors as well as long-term employees, to survive and even to flourish on the tight-rope between operational demands and scholarly respectability. We hope that at least some of our offering will be to his liking.
Despite the two-year-old process of fiscal adjustment in India, the spectre of a government budgetary emergency or even of a government solvency crisis has not been eliminated. The fiscal correction so far has been insufficient to correct for the profligacy of the 1980s. Though the overall public sector financial and primary deficits as ratios to GDP have declined modestly, both the debt-GDP ratio and the present discounted value of the public debt in Rupee terms has risen, albeit more slowly than previously, and a reversal of this pattern seems unlikely, without further measures to reduce public expenditure or raise government revenues.
At the beginning of 1991, a foreign exchange crisis had forced the government to recognize what was already obvious a year earlier: India was in a deep economic crisis. The crisis had as its proximate cause the large and