Fiscal consolidation in the Context of the Budget

February 8, 2023

Context:

The 2023-24 budget aims to satisfy various groups in society, despite challenging circumstances. It attempts to balance growth and stability.

Fiscal Consolidation:

It refers to the policies undertaken by Governments (national and sub-national levels) to reduce their deficits and accumulation of debt stock.
Thus, it is a process where government’s fiscal health is getting improved and is indicated by reduced fiscal deficit.
In India, fiscal consolidation or the fiscal roadmap for the centre is expressed in terms of the budgetary targets to be realized in successive budgets.
The Fiscal Responsibility and Budget Management (FRBM) Act gives the targets for fiscal consolidation in India.
Following factors should be considered by the government to achieve fiscal consolidation.
- Improved tax revenue realization by implementing measures like increasing efficiency of tax administration by reducing tax avoidance, eliminating tax evasion, enhancing tax compliance etc. are to be made.
- Enhancing tax GDP ratio by widening the tax base and minimizing tax concessions and exemptions also improves tax revenues.
- Better targeting of government subsidies and extending Direct Benefit Transfer scheme for more subsidies.

Budgetary support to growth

Government expenditure is budgeted to grow at 7.5% while nominal GDP growth is estimated to fall from 15.4% in 2022-23 to 10.5% in 2023-24.
Thus, the total expenditure relative to GDP is shown to fall from 15.3% in 2022-23 (RE) to 14.9% in 2023-24 (BE).
Increase in the Centre’s capital expenditure is budgeted at 37% while that in revenue expenditure is only 1.2%
State capital expenditures may increase as a result of central grants to the States and interest free loans for creating capital assets in 2023-24
Growth may also be stimulated indirectly due to an increase in private disposable incomes following tax slab adjustments.

Fiscal Responsibility and Budget Management (FRBM) Act:

The FRBM Act of 2018 requires the Indian government to limit its fiscal deficit to 3% of GDP and its debt-GDP ratio to 40% by March 31, 2021.
The government has not indicated the date it aims to reach these targets.
If there is a deviation from the fiscal deficit-GDP ratio of 3%, the Centre is required to state the reasons.
It has only said it will reach a fiscal deficit of 4.5% of GDP by 2025-26, and it may take another 2-3 years to reach the 3% target.
However, even by that time, the debt-GDP target of 40% may not be reached. The government’s high debt-GDP ratio limits its budget for primary expenditure as it must allocate a significant portion towards interest payments.

Private investment

For raising growth in the medium term, augmentation of private investment relative to GDP needs to be ensured.
At present, total investible resources, consisting of financial savings of the household sector amounting to about 8% of GDP and net foreign capital inflows amounting to 2.5% of GDP, may be estimated at 10.5% of GDP.
The central and State fiscal deficits considered together may amount to 9.4% of GDP in 2023-24. This implies that only 1.1% is available for the private sector.

Conclusion

The government borrowing more than the available investible resources can cause inflation. Reducing the fiscal deficit will decrease expenditures, which may not be well received. A strong plan for fiscal consolidation is needed for the medium term.

News Source: The Hindu