India Can Enhance Economic Growth By Pursuing A Prudent Fiscal Path

Moreover, the government focussed on capex spending on infrastructure during the relevant period which also helped in achieving higher GDP growth. Other initiatives aimed at widening the tax base also helped in fiscal restraint

India has been following a prudent fiscal policy and has been aiming at fiscal deficit both of the central and state levels within reasonable and manageable limits.

Efforts are underway to widen the resource base as well as improving the quality of expenditure to keep the revenue deficit within reasonable limits and the primary deficit at manageable levels.

It is necessary for any country to be aware of their fiscal deficit as beyond certain limits this will be considered as not being prudent enough. Moreover, in times of crisis, fiscal buffer will help the country to meet requirements without much of a strain and take the country on the fiscal path.

There haves been several instances of debt crisis faced by the less developed countries, whose only option was in special restructuring and additional aid or help to tide over the crisis.

Not pursuing a prudent fiscal path will be a risky proposition for any country. This is more so in the current period of uncertainty and geo political tensions, apart from the risks of disaster and losses arising out of frequent climate-related disasters.

The global economy is passing through a particularly low economic growth due to global trade uncertainties. The vulnerable countries will find it extremely difficult in managing the debt levels, especially if they have majority debt from external sources. In the absence of enough foreign exchange reserves and a dearth of external sources of funds they will not able to manage external debt. Moreover there is also a risk of domestic currency getting depreciated with these political uncertainties and global trade tariffs.

Moreover, a country that is dependent on imports of even essential materials, then they have to spend more imported material will become costlier. It is hence imperative that every country has to be prudent in fiscal deficit management, which can be addressed to considerable if a conservative policy is place.

As far as India is concerned, it has been striving to follow a prudent fiscal path. Towards this, it has adopted the Fiscal Responsibility and Budget Management Act 2003 and Fiscal Responsibility and Budget Management Rules 2004 that came into force on July 5, 2004. The Acts mandated the central government to keep the fiscal deficit up to three per cent of GDP by March 31, 2021 and endeavour to limit the general government debt to 60 per cent of GDP and the central government debt to 40 per cent of GDP by March 31, 2025.

Fiscal deficit to GDP ratio of central government which was 3.4 per cent as on 2018-19 moved to 4.5 per cent by 2019-20 and went much higher at 9.2 per cent a year later in 2020-21 due to Covid-19 for which the government had to bear higher burden and a stimulus package comprising fiscal and monetary measures. However the government was cautious in resorting to substantial higher fiscal stimulus by way of cash transfer.

Later India had a substantial economic revival and that helped the government to bring down the fiscal deficit to 6.7 per cent, 6.4 per cent, 5.6 per cent and 4.8 per cent (expected) for 2021-22, 2022-23, 2023-24 and 2024-25, respectively. This is a substantial improvement. Moreover the government focussed on capex spending on infrastructure during the relevant period which also helped in achieving higher GDP growth. Other initiatives aimed at widening the tax base also helped in fiscal restraint.

In the glide path to fiscal consolidation by FY 2025-26, the government has stated that the fiscal deficit will be at below a level of 4.5 per cent has been maintained with fiscal deficit of 4.4 per cent budgeted for 2025-26. As a further fiscal consolidation path for 2026-27 to FY 2030-31, the government has set for itself the goal of bringing down the central government debt as percentage of GDP which is currently at 57.1 per cent, which is expected to be at 56.1 per cent by 2025-26 that is to be brought down below 50 per cent by March 31, 2031, which marks the last year of the 16th Finance Commission.

Meanwhile, at varying nominal growth @10 per cent, 10.5 per cent, and at 11 per cent in mild, moderate and high case scenario analysis has been made with the aim to bring the central government debt below 50 per cent by March 31, 2031. This is an honest and desired attempt by the government with requisite operational flexibility to respond to unforeseen developments.

The aforementioned fiscal path depends upon the continued growth momentum of India and also resulting in enhanced tax and non-tax revenues of the government and widening the tax base which is at 12 per cent of GDP, and fiscal prudence followed so far has to continue. The quality of expenditure has to be more for productive and have a multiplier impact by way of capex expenditure. There should be a continuation of attempts to reduce subsidies and avoidable expenditure. It should be noted that in the Indian context, a majority of government borrowings are from domestic sources, which is an encouraging sign. However, the current uncertainties arising out of global trade tariffs and non-tariffs barriers that are India's exports have to be managed with proactive policy initiatives and thereby reduce the external sector crisis.

Some advanced countries are also having large fiscal deficits currently, which up to a certain extent, is manageable. Going forward there is a need to bring it down substantially.

Enhanced economic growth and prudent fiscal path are the best for ensuring sustainable growth.

(The author is former Chairman & Managing Director of Indian Overseas Bank)