First, India’s public debt and fiscal deficit as a proportion of GDP is currently among the highest in the world, but it has been financed almost entirely from domestic savings. There is a commitment to fiscal consolidation in the medium term with the implementation of the Fiscal Responsibility and Budget Management Act, 2003.
In the interim, however, before embarking on any faster pace of external financial liberalisation, the possible spill-over effects of fiscal deficits into external sector need to be carefully evaluated. Second, it is widely recognised that financial instability can lead to high variability in real activity and, as the Asian financial crisis has tellingly demonstrated, even cause interruptions in the growth process.