PUBLIC EXPENDITURE POLICY IMPLICATIONS FOR OUTPUT, PRICES, AND BALANCE OF PAYMENTS: AN EMPIRICAL STUDY OF INDIAN ECONOMY (INDIA)

This study analyzes the impact of public expenditure policies on output, prices and balance of payments in India. The orthodox stabilization theory, the stucturalist critique, and the recent emphasis on structural adjustment with respect to developing countries have been discussed in this study. It has been pointed out that there has been a gap in the theoretical and empirical literature with regard to the treatment of public expenditure policies in the context of stabilization and structural adjustment programs. Empirical investigation of specific public expenditure policies, i.e., public expenditures for food subsidy, infrastructural investment, and crude petroleum production with reference to the Indian economy has therefore been undertaken in this study. A macroeconometric model for the Indian economy has been constructed for analyzing the effects of public expenditure for food subsidies, investment in public infrastructure, and crude oil productions. The methodology used is deterministic, dynamic simulation of the estimated model. The study has concluded that public food subsidy expenditures can play a role in the stabilization of prices. Increase in public food subsidy expenditures will reduce food and overall prices in the short run. Removal of food subsidies will add to the inflationary pressures in the economy by raising food and aggregate prices. The study confirms the catalytic role of public investment expenditures in agriculture and infrastructure in stimulating private investment in these two key sectors. Even though public investment expenditures for the development of infrastructure increases aggregate prices and balance of payments deficits in the short run, these investment expenditures increase private investment and aggregate output in the medium term. The initial increase in aggregate price level as a result of higher public investment expenditure, is dampened in the medium term. However, the negative effect on foreign exchange reserves persists even in the medium term. Increase in investment expenditure in the oil sector contributes to the higher level of prices and external deficits in the short run. In the medium term, investment in the oil sector reduces the balance of payments deficits.