Fiscal Consolidation, Growth and Employment: International Evidence and Implications for India

Abstract

The paper argues that many national governments, including the one in India, focus on insufficiently robust point estimates pertaining to specific debt/deficit thresholds that create a fiscal consolidation bias. This is costly in terms of output and employment losses. The paper points out that labour market reforms to support fiscal consolidation are often advocated by international agencies, but one should not ignore the high short-run costs of such reforms. These lessons of international experience are highly pertinent to India as it is poised to implement a new fiscal framework. The paper emphasizes that India faces the major challenge of providing productive and durable jobs for its burgeoning work force while ensuring improved social indicators. Adequate and sustainable financing of such critical development needs ought to be at the centre of any fiscal framework.