Lessons of Public Finance for Developing Economies, with Special Reference to India

This paper presents what its author believes are the eight main principles or lessons of public finance of particular relevance to developing countries, together with a very brief comment on India’s performance relative to the criteria established in the eight lessons. Those lessons are drawn from the many generations of academic economists who have focused on one or more of the important issues that arise in analyzing the appropriate role of the public sector in promoting economic development and overall societal well being. In so doing, economists have brought to bear successively more rigorous analytical methods, empirical information, and comparative evidence from historical (and international) real-world case studies.

Certainly, in any real-world situation, various compromises with principles will have to be made, and perhaps especially so in a vibrant democracy like India. But to the extent that India’s fiscal program roughly can reflect these principles rather than contradict them, the Indian economy will tend to perform better over the long run. And fast economic growth is essential in freeing people from poverty; although a rising tide will not lift all boats, it will lift by far the most boats. Using some of the resources generated from rapid growth to help the poor is a far more sensible strategy than one, however well-intentioned, that assigns so large an economic role to government that the impetus of growth is undermined.