Thursday, February 22

Fiscal dominance in India: Through the windshield and the rearview mirror

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By Anshuman Kamila

Working Paper No- 429

Theoretical works have pointed at the potentially damaging impacts of fiscal dominance, i.e. fiscal authority’s profligacy being accommodated by the monetary authority. Recent scholarship have highlighted to the contrary the arguably positive effects of such accommodation under certain circumstances. Ergo, a surgical snipping of the cord of joint working of monetary and fiscal policy for all times is not advisable. This article argues that in the Indian context, the impact of fiscal operations or expansionary fiscal policy may have proved counter-productive in the past but the recent time period have shown a clear break from the past trend. As such, monetary accommodation of fiscal activism under conditions where other engines of economic activity have cooled down emphatically is advisable.

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