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Making of a Payments Crisis: India 1991
Economic and Political Weekly
Vol. 27, No. 33 (Aug. 15, 1992), pp. 1741-1745
Published by: Economic and Political Weekly
Stable URL: http://www.jstor.org/stable/4398751
Page Count: 5
You can always find the topics here!Topics: Federal budget deficit, Balance of payments deficit, Economic inflation, Investment risk, Balance of payments, Capital gains, Productivity, Tax payments, Financial economics
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Inflation erodes the real value of a nominal debt, and thereby confers a capital gain upon the debtor. Such capital gain resembles the so-called 'inflation tax', or what Cagan calls 'the tax on cash balances'. This paper recognises the inflation-induced capital gain to the government of India as a positive item in the budget; it is the other side of the Pigou effect. The fiscal deficit thus adjusted is relatively small in size and non-increasing over time. Hence, we conclude that the fiscal deficit and the current payments crisis in India are unrelated, contrary to the official claim. The secular decay of the total factor productivity observed in India's manufacturing industries is arguably the underlying reason for long-term strain on its balance of payments. In certain conjunctures it leads to a full-fledged crisis. The net profit on investment in India, on an average, seems stable over time; but the associated risk is presumably high and inoptimally distributed. A Pareto optimal allocation of risk among workers and investors can possibly stem capital flight and stimulate investment. The government has a central place in the economy to create dynamic comparative advantage.
Economic and Political Weekly © 1992 Economic and Political Weekly