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Introduction:

India’s fiscal health, encapsulated by its fiscal deficit and public debt, has been a source of concern for economists and policymakers alike. While these concerns predate the pandemic, the economic repercussions of COVID-19 have deepened the divide, pushing India into a tight fiscal space. 

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Concerns Post-Pandemic:

• Spiraling Fiscal Metrics: 
  • Before the COVID-19 pandemic, India grappled with one of the highest debt levels among emerging markets. 
  • However, the crisis intensified this trend. 
  • In 2020-21, the fiscal deficit skyrocketed to 13.3% of GDP, and aggregate public debt surged to 89.6%. 
  • Though there’s been a recovery with the fiscal deficit and public debt receding to 8.9% and 85.7% respectively, the numbers remain worrisome.
• Financial Market Distortions: 
  • The artificially suppressed interest rates on government borrowings, owing to RBI’s policies like SLR, might offer short-term gains but risk long-term market distortions.
  • For example, the mandated SLR of 18% for banks has limited their lending potential to industries, affecting sectors like manufacturing.
• Relegation of Key Expenditures: 
  • Increased debt levels mean more government resources are funneled into servicing this debt, compromising spends on essential sectors.
  • For example, Health expenditure, crucial in a post-pandemic scenario, might suffer due to the increased debt burden.
• Economic Response Limitations: 
  • High debt constrains the government’s maneuverability in responding to future economic challenges.
  • In the face of another downturn, the government might not have the fiscal space for stimuli or relief packages.
• Captive Debt Market: 
  • India’s debt market, dominated by banks and insurance firms, has restricted diversity and flexibility.
  • This scenario leads to higher borrowing costs for industries, with sectors like infrastructure particularly affected.

Challenges to Medium-Term Sustainability:

• Electoral Spending: 
  • The upcoming elections may push the government towards populist measures, further straining the fiscal deficit.
  • For example, As witnessed in the past, the farm loan waivers announced before past elections, showcase the pattern of such populistic spending.
• State-wise Disparities: 
  • States such as Punjab, Kerala, and Rajasthan showcase alarming debt-to-GSDP ratios, indicating uneven fiscal health across the country.
  • For instance, Kerala’s debt-to-GSDP ratio in 2020 was over 36%, a concerning figure when gauged against its developmental needs.
• Interest Payment Burdens: 
  • Escalating public debt results in elevated interest payments, eating into a significant portion of revenue receipts.
  • For example, Interest payments in India for 2020-21 stood at around 5% of GDP.
• Repressed Financial Environment: 
  • The financial repression, though controlling debt costs, can affect the banking sector’s profitability and limit credit availability for industries.
  • For instance, The long-term reliance on tools like SLR can deter foreign institutional investors from the Indian bond market.
• Sovereign Ratings: 
  • Elevated deficits can impact India’s sovereign rating, increasing borrowing costs.
  • For example, In 2020, Moody’s downgraded India’s rating, citing challenges in implementing policies to mitigate risks of a sustained period of low growth.

Policy Interventions:

• Optimizing GST: 
  • Enhancing GST and fortifying compliance mechanisms can augment revenues.
  • For instance, Successful GST optimizations in the past, like rate rationalizations, led to monthly GST collections crossing the 1 lakh crore mark multiple times in 2019.
• Privatization and Disinvestment: 
  • The government should divest from sectors where the private arena can drive efficiency.
  • The proposed disinvestment of Air India is a step in this direction.
• Direct Cash Transfers: 
  • Emphasizing direct cash transfers can be more efficient than blanket commodity subsidies.
  • The PM-KISAN scheme is a testament to the efficacy of direct transfers.
• Budgetary Discipline:
  • Imposing stringent Fiscal Responsibility and Budget Management rules can ensure states adhere to fiscal prudence.
• Reassessing Subsidy Frameworks: 
  • Rethinking subsidy structures, ensuring they reach the needy and are efficient, can lead to considerable fiscal savings.
  • For instance, The LPG subsidy reform, where subsidies are targeted towards the underprivileged, showcases potential savings.

Conclusion:

India’s fiscal scenario, in the aftermath of the pandemic, underscores the necessity for foresight, discipline, and proactive measures. While the challenges are manifold, a targeted, data-driven approach can steer the nation towards a path of fiscal consolidation and sustainable growth. Addressing the current fiscal concerns will not only ensure macroeconomic stability but also lay the groundwork for a resilient, prosperous future.

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