Macroeconomics, 2nd Edition by Pearson

THE

IS–LM

MODEL

255

8.6

IS–LM

in India

Prior to the liberalization of the Indian economy in the 1990s, fiscal policy was

the dominant tool of macroeconomy policy and monetary policy played a sub-

servient role.

18

Prior to the 1990s, increases in government expenditure—fiscal

policy—were financed through two main mechanisms. The increased govern-

ment borrowing was accommodated by hikes in the

STATUTORY

LIQUIDITY

RATIO

(SLR)

imposed on commercial banks. This allowed the placement of government secu-

rities with commercial banks at below market rates of interest. By 1990, the SLR

was 39 per cent. Second, the residual funding ...