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The government’s recent track record on fiscal consolidation is indeed commendable. From a staggering 9.2% of GDP in 2020-21, the Centre’s fiscal deficit is projected to shrink to 5.9% in the current fiscal year. This progress is largely attributed to increased capital expenditure, a vital fuel for infrastructure development and economic growth.
However, the journey towards sustainable fiscal health is far from over. The medium-term target of 4.5% set for 2025-26 looms large, and the path to reach it appears shrouded in some uncertainty. Finance Minister Nirmala Sitharaman is expected to announce a provisional deficit target of around 5.3% for 2024-25 in the upcoming budget. While this marks a significant step closer to the ultimate goal, it only covers roughly half the remaining distance.
The challenge lies in navigating the tricky balancing act between supporting economic growth and achieving fiscal prudence. Fitch Ratings aptly summarizes this dilemma, stating that “trade-offs between economic growth and consolidation may become more acute” beyond the current year. Injecting funds into the economy to stoke growth often comes at the cost of higher deficits, while pursuing aggressive fiscal consolidation can potentially stifle economic momentum.
The way forward: A multi-pronged approach
- Continued focus on capex: Maintaining momentum on capital expenditure is crucial for long-term infrastructure development and economic productivity. This doesn’t necessarily mean abandoning fiscal prudence, but rather seeking innovative financing mechanisms, such as public-private partnerships, to optimize investments.
- Revenue buoyancy: Increasing tax revenue without overburdening taxpayers is key. This can be achieved through improved tax administration, broadening the tax base through measures like formalizing the informal sector, and exploring alternative sources of revenue such as asset monetization.
- Rationalizing expenditure: Reviewing and streamlining government spending, prioritizing key welfare programs, and eliminating wasteful expenditure can contribute significantly to fiscal consolidation without hampering essential services.
- Transparency and accountability: Building public trust through transparent fiscal policies and ensuring accountability in spending are crucial to garner public support for any fiscal consolidation efforts.
The upcoming budget: A window of opportunity:
The interim budget in February presents a vital window of opportunity for the government to showcase its roadmap for achieving fiscal sustainability while supporting economic growth. Policy announcements must carefully address the concerns of economists and rating agencies while striking a chord with the public yearning for both economic revival and responsible fiscal management.
Balancing growth and fiscal prudence has always been a complex challenge for developing economies, but it is a challenge that India cannot afford to ignore. The choices made in the upcoming budget will have far-reaching consequences for the nation’s economic future.