Context:
A fiscal deficit of around 3 per cent of the gross domestic product (GDP) for the central government, as advocated by the International Monetary Fund (IMF), is difficult since a significant amount of capital expenditure previously undertaken by state-owned enterprises (SOEs) has been brought onto the central government budget.
The push by the government to IMF on the 3% fiscal deficit target
- Therefore, the IMF recommends India to bring down its central fiscal deficit to 3% of GDP, which includes a combined deficit (Centre + States) below 6%.
- Government says
- In capital expenditures done by state owned enterprises (SOEs), the earlier capital expenditure is found in the central budget, making it a difficult 3% target.
- Complete elimination of revenue deficit can compromise with economic growth.
Gradual medium term fiscal consolidation
- Both agree that fiscal consolidation is necessary among IMF and the Indian government, however, they want to adjust it gradually due to global uncertainties.
- Government’s debt strategy
- Because most of the public debt is long term, fixed rate, and held domestically, the risks are reduced.
- Target to lower the debt to GDP ratio to 50% by FY31 (from 57.1% in FY25).
- For FY26, the target will be adjusted to 56.1%, based on nominal GDP growth of 10.1%.
Fiscal Reform by IMF Recommendations
- Revamping FRBM Act includes
- Medium term projections for macroeconomic variables
- A clear fiscal roadmap for both Union governments and for states
- Escape clauses for flexibility in the event of economic shocks.
Measures Employed to Increase Revenue
- Simplifying the GST and reversing the past GST rate cuts.
- Exhibit an Reversal in fuel excise cuts and broaden the income tax base.
- Allowing domestic energy prices aligned with international rates.
Main Takeaways
- India prefers slow gradual fiscal adjustment in which growth is given priority by being against aggressive deficit cuts.
- Government debt strategy will thus be based primarily on stable, long term borrowing, making it less risky.
- Stronger operational revenue mobilization is demanded by the IMF through: GST reform & subsidy rationalization.
- There should be a revamped fiscal policy framework for better transparency and long term stability.
Expenditure Rationalization
- Improved targeted subsidies and conversion toward direct cash transfers wherever possible.
- Retrospectively analyzing budget schemes to find cost saving opportunities.
Source: Business Standard
