Context – In her Budget speech, FM revealed the government’s plans to reduce the fiscal deficit to 5.1% of GDP in 2024-25 and below 4.5% by 2025-26, surprising many analysts who expected slightly higher deficit targets.
Fiscal consolidation, the process of reducing government deficits and debt accumulation, stands as a critical agenda for India’s economic stability and growth trajectory. The concept encapsulates the prudent management of public finances to ensure sustainability, stability, and optimal allocation of resources. In the Indian context, fiscal consolidation remains pivotal, especially amid dynamic global economic landscapes and domestic challenges.
What is Fiscal Deficit?
- Fiscal deficit represents the gap between a government’s revenue and its expenditure. When expenses exceed revenues, the government must borrow money or sell assets to cover the deficit.
- Taxes are the primary source of government revenue. In 2024-25, tax receipts are expected to be ₹26.02 lakh crore, while total revenue is estimated at ₹30.8 lakh crore. Total government expenditure for the same period is projected at ₹47.66 lakh crore.
How does the Government Fund the Fiscal Deficit?
- Borrowing: To finance the fiscal deficit, the government borrows money from the bond market, where lenders compete to purchase government-issued bonds.
- Central Banks: Central banks, such as the Reserve Bank of India (RBI), play a significant role in the credit market by purchasing government bonds in the secondary market, indirectly providing funds to the government.
- Borrowing Amount: In 2024-25, the Centre aims to borrow ₹14.13 lakh crore from the market, lower than the target for 2023-24.
Why Fiscal Deficit Matters?
- Inflation: High fiscal deficits can lead to inflation, as the government may resort to printing money to fund the deficit.
- Market Confidence: Fiscal discipline, reflected in lower deficits, can boost confidence among lenders, potentially improving bond ratings and reducing borrowing costs.
- Debt Management: A high fiscal deficit can strain the government’s ability to manage public debt. India’s public debt may rise significantly, affecting the country’s fiscal health.
- International Borrowing: A lower fiscal deficit may make it easier for the government to issue bonds overseas and access cheaper credit.
Fiscal Consolidation and its Importance:
Economic Stability and Investor Confidence:
Fiscal consolidation fosters economic stability by curbing excessive government borrowing, which can crowd out private investment and inflate interest rates. A disciplined fiscal policy signals commitment to sound macroeconomic fundamentals, bolstering investor confidence and enhancing capital inflows. Consequently, a conducive investment climate stimulates economic growth, job creation, and poverty alleviation.
Sustainable Debt Dynamics:
India’s burgeoning public debt poses a formidable challenge to fiscal sustainability. Fiscal consolidation endeavors to contain debt accumulation, averting the risk of sovereign default and macroeconomic instability. Prudent debt management facilitates fiscal space for critical public expenditures, including infrastructure development, healthcare, and education, essential for fostering inclusive growth and human development.
Macroeconomic Stability and Inflation Management:
Effective fiscal consolidation contributes to macroeconomic stability by curbing inflationary pressures and narrowing fiscal deficits. By rationalizing expenditure patterns, enhancing revenue mobilization, and minimizing fiscal imbalances, policymakers can mitigate inflationary risks and maintain price stability. A stable price environment fosters consumer confidence, sustains purchasing power, and augments overall welfare.
Challenges and Policy Imperatives:
- Structural Reforms and Expenditure Rationalization: India’s fiscal landscape is characterized by persistent revenue shortfalls, burgeoning subsidies, and inefficient public expenditure. Addressing these structural inefficiencies necessitates comprehensive reforms encompassing subsidy rationalization, public sector efficiency enhancement, and expenditure prioritization. Rationalizing subsidies, particularly in sectors prone to leakages and distortions, can optimize fiscal resources and foster allocative efficiency.
- Revenue Mobilization and Tax Reforms: Enhancing revenue mobilization remains imperative for fiscal consolidation efforts. India’s tax-to-GDP ratio lags behind peer economies, reflecting structural deficiencies in tax administration and compliance. Implementing progressive tax reforms, broadening the tax base, and rationalizing tax structures can augment revenue receipts sustainably. Moreover, leveraging technology-enabled tax administration can enhance compliance, curb tax evasion, and augment revenue collections.
- Public Expenditure Efficiency and Quality: Efficient utilization of public expenditure is pivotal for realizing optimal developmental outcomes. Strengthening public expenditure management frameworks, enhancing transparency, and fostering accountability are essential imperatives. Emphasizing outcome-oriented budgeting, performance evaluation mechanisms, and expenditure reviews can enhance fiscal discipline, foster accountability, and optimize resource allocation across sectors.
Conclusion:
Fiscal consolidation stands as a linchpin for India’s economic resilience, sustainability, and inclusive growth aspirations. As India navigates through evolving global economic dynamics and domestic imperatives, concerted efforts towards fiscal prudence, structural reforms, and policy coherence are indispensable. Sustained fiscal consolidation, anchored in prudent debt management, revenue mobilization, and expenditure rationalization, is imperative for fostering macroeconomic stability, investor confidence, and sustainable growth trajectories.
SOURCE: The Hindu
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