AMAL SANYAL* The Fiscal Crisis and the Monetary System** The following is meant to be a survey of the developments in the monetary and the financial spheres in India since her Independence in 1947. The development has been viewed in the context of India's fiscal crisis. The nature of the fiscal crisis has been stated in the beginning, rather sketchily, only to motivate the survey of the monetary and financial developments.1 The fiscal difficulties of the Government of India are well known. The features most often commented upon are the rising ratio of budget deficit to total annual budget, the balance of payments difficulty, the rising ratio of the government's consumption expenditure to total outlay, rise in transfers including interest payment, and the continued inability to tax certain kinds of income. The persistence of these difficulties lends itself to a simplistic deduction of a fiscal crisis of the Indian State, which runs as follows. With time the gap between productive capacity and private effective demand increases, leaving the State with the responsibility of providing supplementary effective demand, particularly in the form of public investment, which with a lag might induce larger private investment in the future. The widening gap between capacity and private demand requires the State's supplementary expenditure to increase faster than the growth of the system, while political status quo would permit revenue mobilisation, at the maximum, to grow at the rate at which the system itself is growing. The result is a growing deficit of the govemmeht to be covered by a combination of foreign borrowing, domestic borrowing or money creation. The difficulty accentuates depending on the specific mix of these options, resulting in larger interest payments obligation (at home or abroad) and inflation, both aggravating the original problem. Through relative income adjustments against the poor, a temporary correction may be sought by the system, but it will rebound back through Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. i|c i(e • This is a revised version of a paper presented at the seminar on 'Pony Years of Development' organised by the Indian School of Social Sciences at Delhi in October, 1987. The author is grateful for comments from Shiela Bhalla, Arun Kumar, Pravin Jha, Prabhat Patnaik, Amaresh Bagchi, Amiya Bagchi, and Geeta Sen.