7.20          ndian     onom
     especially) and growth was sacrificed at the altar        to price rise.57 For any government deficit if the
     of lower inflation (which was politically more            Central Bank (RBI) is purchasing primary issues
     justified).53 Thus, the supply-side mismatch              of the Government securities or creating fresh
     remained a long-drawn problem in India for                advances to the government, the combined effect
     higher inflation. After some time even if the             has to be higher inflation, lower savings rates and
     government managed higher expenditure, most               lower economic growth58—the vices of unsound
     of it went to the non-developmental areas, which          fiscal policy. The higher fiscal deficit tends to bring
     did show low growth with higher inflation—signs           about higher interest rates as demand for funds
     of a stagnating economy.                                  rise, excess demand raises expected inflation and
     2. Cost-Push Inflation                                    expected depreciation of the currency.59 Once
                                                               the foreign exchange (Forex) reserves started
     Due to ‘inflation tax’ the price of goods and
                                                               increasing with a faster pace by the early 2000–01
     services in India have been rising as the government
                                                               fiscal, its cost of maintenance has been translated
     took alternative recourse to increase its revenue
                                                               into higher prices, as the RBI purchases the foreign
     receipts.54 We see it taking place due to higher
                                                               currencies it supplies into equivalent rupees into
     import duties on raw materials also.55 The non-
                                                               the economy, which creates extra demand and the
     value-added tax (non-VAT) structure of India
     in the past was also having cascading effect on           prices go up.60
     the prices of commodities in the country.56 The                The higher revenue deficits (driven by high
     government needed higher revenues to finance              interest payments, subsidies, salaries and pensions,
     its planned development, thus the above given             basically) and fiscal deficits make the government
     factors looked inescapable.                               supply more money which push the inflation in
                                                               the upward direction. Once the Fiscal and Budget
     3. Fiscal Policy
                                                               Management Act came into force in 2003, the
     To finance the developmental requirements of the          scenario improved in the coming times. Though
     economy, the governments became trapped in the            the period from 1999 to 2003 did show high
     cyclical process of over-money supply. At first it was    growth with low inflation and the lowest interest
     done by external borrowings, but by the late 1960s        rates in India.
     onwards (once deficit financing got acceptance
                                                                 57.     . . ande ar, orty ears After ndependence ,
     around the world) the government started taking
                                                                       (New Delhi: Penguin Books, 1992), pp. 81–88. in the
     recourse to heavy internal borrowings as well as                  Bimal Jalan (ed.), Indian Economy: Problems and
     printing of fresh currency too. A major part of the               Prospects.
     government’s internal borrowing is contributed              58.   Y.V. Reddy, Lectures on Economic and Financial
                                                                       Sector Reforms in India (New Delhi: Oxford University
     by the Reserve Bank of India (RBI) which leads                    Press, 2002), pp. 176–77.
                                                                 59.   Ashima oyal, u les in ndia erformance eficits
       53.   Jalan Bimal, India’s Economic Policy, (New Delhi:
                                                                       without iaster in irit S. ari h and . adha rishna
             Penguin Books, 1992), pp. 52–58.
                                                                       (eds), India Development Report, 2004–05 (New
       54.   C. angara an, evelopment, n ation and onetary             Delhi: IGIDR and Oxford University Press, 2005),
              olicy , in . . Ahluwalia and . . . ittle eds ,           pp. 191–208.
             India’s Economic Reforms and Development, (New
                                                                 60.   Kaushik Basu, India Emerging Economy:
             Delhi: Oxford University Press, 1998), pp. 56–57.
                                                                       Performance and Prospects in the 1990’s and
       55.   Jalan, India’s Economic Policy, pp. 191–203.              Beyond (New Delhi: Oxford University Press, 2004),
       56.   Chelliah Committee Report, 1993.                          pp. 89–103.