Tuesday, February 17, 2009

Fiscal deficit will rise - is there a choice?

The economic downturn has caught the government on the back-foot from both sides - declining revenues and rising expenditures (and here and here) - on fiscal expansion.

Classical economic theory tells us that counter-cyclical policies, that run up deficits during slowdowns and balances them during the up-turns, are critical to stimulate the economy at times of weakness. So given the economic crisis facing the global economy and the need for fiscal stimulus, widening deficits are inevitable. India's mistake was that we forgot to build-up a cushion during the good times.

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