ROAD MAP FOR FISCAL CONSOLIDATION

THE CONTEXT: Recently, the interim Budget or ‘vote on account’ for 2024-25 was presented by Finance Minister. The budget refrained from making any changes to tax rates either for direct taxes or indirect taxes but highlights increased capital expenditures and fiscal consolidation.

HIGHLIGHTS IN THE BUDGET:

• Capital Expenditure: One important feature of the Budgets presented in recent years is an increase in capital expenditures of the Central government. The interim Budget has maintained this trend and has provided for an increase of 11.1% in capital expenditures when a comparison is made with the 2023-24 Budget Estimates. This aims to stimulate investment climate, potentially catalysing private sector participation and underscores the government’s commitment to infrastructure development.
• Growth Rates Analysis: While the interim budget indicates an 11.1% increase in capital expenditures compared to the 2023-24 Budget Estimates, the growth rate is lower than initially planned. This lower growth rate aligns with the real GDP growth of 7.3% in 2023-24.
• Potential Impact on GDP Growth: The projected 17% growth in capital expenditure for 2024-25 suggests the potential for achieving a 7% real GDP growth. It can be achieved if private sector investment momentum is sustained and state governments maintain their capital expenditure growth, supported by government initiatives such as interest-free loans.
• Tax buoyancy: The buoyancy of tax revenue, coupled with nominal GDP growth estimates, provides flexibility for future expenditure adjustments or deficit reductions. The buoyancy of tax revenue comes to 1.33, if the base is taken as Budget Estimates of the present year and using nominal GDP growth for 2023-24 as per the National Statistics Organisation’s (NSO) first advance estimates.
• Fiscal Planning: The budget showcases prudent fiscal planning and the emphasis on fiscal correction and consolidation reflects a cautious approach to economic management.
• Fiscal Deficit Reduction: A significant aspect of the budget is the projected reduction in the fiscal deficit. The fiscal deficit for 2024-25 is forecasted to decrease to 5.1% of GDP reflecting a decrease of a 0.7 percentage point from the previous year.
• Long-term Fiscal Objectives: The budget discussion revolves around the desired fiscal deficit targets, particularly aiming for 3% of GDP for the Central government and not exceeding 6% of GDP when combined with State governments. The rationale behind these targets is intricately linked to household savings, net inflows from abroad, and the imperative to manage debt-GDP ratios effectively.
• Debt-GDP Ratio: The government proposes a debt-GDP ratio target of 40% for the Centre by 2028-29 which a strategic vision for sustainable fiscal management over the long term. This would be feasible as the government has extended the interest-free loan facility for the State governments. The lower fiscal deficit might also facilitate a lowering of interest rates later during the year.
• Capital formation: Though, capital expenditures of the government are not identical with gross fixed capital formation. However, it contributes to increasing capital formation. It is worth noting that the capital expenditures of the Central government in 2024-25 as a proportion of GDP are budgeted to increase marginally from 3.2% in 2023-24 to 3.4% in 2024-25.

THE WAY FORWARD:

• Continued Government Investment: In developing economies, growth is driven by investment. Therefore, for the continued growth of the economy, there is a need for an sustained investment rate which can be improved only by the government raising its own investment. It could act as a catalyst for private investment.
• Ensuring Economic Stability: These targets are rooted in the goal of ensuring economic stability by maintaining sufficient household savings, curbing inflationary pressures, and fostering sustainable economic growth.
• Setting timelines: The timeline for achieving the targets highlighted in budget must be carefully delineated to mitigate inflationary pressures for ensuring sustainable economic growth.
• Coordination: Achieving these targets necessitate continuous coordination and implementation, considering the dynamic nature of economic conditions amidst evolving global and domestic factors.

THE CONCLUSION:

The recent interim Budget lays a foundation for sustainable fiscal management, emphasizing on capital expenditure enhancement and fiscal consolidation. However, achieving long-term fiscal sustainability requires concerted efforts, including aligning fiscal policies with economic realities and establishing clear targets for deficit reduction.

UPSC PREVIOUS YEAR QUESTIONS

Q.1 What are the reasons for introducing the Fiscal Responsibility and Budget Management (FRBM) Act, 2003? Discuss its salient features and their effectiveness critically. (2013)

Q.2 Public expenditure management was a challenge to India’s government in the context of budget-making during the post-liberalization period. Clarify it. (2019)

MAINS PRACTICE QUESTION

Q.1 Highlight the challenges in achieving long-term fiscal sustainability in the country, considering the dynamic economic conditions amidst evolving global and domestic factors.

SOURCE: https://www.thehindu.com/opinion/op-ed/road-map-for-fiscal-consolidation/article67821293.ece