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Kenneth Kletzer is Resident Scholar at the IMF and Professor at the University of California, Santa Cruz. Renu Kohli is Professor at the Indian Council for Research on International Economic Relations, New Delhi and was Visiting Scholar at the IMF in May 2001. We are grateful to Paul Cashin, Patricia Reynolds, Christopher Towe and Peter Wickham for many helpful comments and suggestions.
Recent empirical and theoretical work on the relationship between financial repression and economic growth includes King and Levine [1993a and 1993b] and Bencivenga and Smith . Roubini and Sala-i-Martin  restrict their study of financial repression and growth to the relationship between inflation taxation and growth.
Our model differs from earlier work, for example, McKinnon and Mathieson , in the incorporation of explicit optimizing behavior in a contemporary macroeconomic model. Brock  studies the correlation between inflation taxation and reserve requirements in an optimizing framework. We emphasize the relationship between financial repression and exchange rate regimes in the open economy. More recently, Gupta and Lensink  use a simulation model to study the effect of taxation of the financial sector on domestic capital formation.
Estimates of revenues generated by financial repression for a wide range of developing countries are given by Giovannini and de Melo  and Fry, Goodhart and Almeida  among many others for specific countries. Financial repression is comparatively important for public finance for India, but not unusually so.
A frequent justification for capital controls in India, as elsewhere, has been to insulate the economy from external shocks. After the Asian financial crises in 1997, capital controls were credited with protecting India from contagion by a wide variety of commentators. Towe  studies the factors that might have protected India from the Asian crisis.
Brock , Courakis  and Sussman  each emphasize the importance of reserve requirements and the taxation of interest income on liquidity requirements in financial repression in developing countries. Brock , in particular, uses a monetary model based on optimizing behavior to show the role of reserve requirements in inflation taxation.
In the application of this model below, imports of consumer goods should be interpreted as inclusive of consumer durables. Also, certain restrictions on portfolio and equity capital inflows have been relaxed recently, but private capital account transactions arc widely curtailed.
We modify the procedure of Giovannini and de Melo. They divide interest payments plus interest arrears by a simple average of current and once-lagged external debt outstanding and disbursed to calculate the average interest rate. We use only the contemporaneous debt in the denominator. The smoothing of debt stocks used by Giovannini and de Melo changes the estimates very little for India.
The data are taken from the World Bank, Global Development Finance. Note that we do not include interest arrears in the text because these are zero throughout the study period for India.
This approach estimates the average interest differential paid on outstanding debt. One alternative approach would be to use the interest terms on new loan commitments, but unfortunately these are forward-looking and would not allow us to measure current financial repression revenues. Another alternative would be to use secondary market yields on government debt. However, banks are overwhelmingly the holders of domestic public debt so that these yields still reflect the liquidity requirements imposed on banks and do not represent open market yields on government bonds.
Burnside, Eichenbaum and Rebelo  calculate the fiscal costs of financial crises for Mexico (1994) and Korea (1997) including the benefits of devaluation for domestic currency-denominated public sector liabilities, implicitly without allowing perfect foresight.
Cointegration tests confirm purchasing power parity between India and the United States using producer price indices and monthly data for the period, 1993-1999.
The primary deficit has grown considerably since 1997. Reynolds  uses a simple growth model to argue that India has taken advantage of a low difference between real interest rates and rates of growth to sustain the renewed accumulation of public debt but that another fiscal crisis could appear. This point is also argued by Srinivasan .
All figures are calculated from the IMF, International Financial Statistics. Monetary growth is calculated by summing lines 34 and 35.