Opinion

Fisc forward, balancing multi-objectives: GoI's fiscal consolidation efforts are also closely tied to its broader economic reforms agenda



Nirmala Sitharaman has presented a comprehensive strategy for India’s economic growth and development, riding on the strong fundamentals of fiscal consolidation. Strong fiscal foundations are crucial for maintaining economic stability, fostering sustainable growth and positioning India as a resilient player in the global economy. GoI’s strategy for public investment and social welfare balances the need for continued investment in key sectors, with the imperative of reducing fiscal deficit demonstrating a nuanced understanding of an emerging economy’s multiple challenges.At the core of the budget proposals is GoI’s strong commitment to fiscal consolidation. This strategy has kept India in good stead. The fiscal deficit target for FY25 has been set at 4.9% of GDP, marking a continuation of GoI’s efforts to gradually reduce the deficit. This target aligns with the broader goal of bringing fiscal deficit below 4.5% of GDP by FY26, as outlined in the glide path for fiscal consolidation announced in 2021-22. This steady approach to deficit reduction reflects GoI’s prudent fiscal management, balancing the need for economic stimulus with long- term financial stability.

Importance of fiscal consolidation cannot be overstated in the current global economic context. A lower fiscal deficit reduces GoI’s borrowing needs, potentially lowering interest rates and creating more room for private sector investment. It also enhances India’s credibility in international financial markets, potentially leading to improved sovereign credit ratings and attracting more foreign investment.

It also prevents a spillover on to the current account, which could put pressure on the currency. Experience suggests that fiscal stability is critical for sustained growth and crisis prevention, especially for emerging economies.

A key component of the fiscal consolidation strategy is the focus on capital expenditure. The budget proposes a significant allocation towards capital spending to sustain infrastructure development momentum. This emphasis on capex is crucial, as it has a multiplier effect on the economy, potentially leading to higher growth rates and, consequently, higher tax revenues in the future. By prioritising productive investments over current expenditures, GoI aims to create a virtuous cycle of growth and fiscal improvement.The budget also recognises the importance of state governments in the overall fiscal consolidation effort. It proposes enhanced public infrastructure investments through support to states for capital spending. This approach not only helps in improving the overall infrastructure of the country but also ensures that benefits of fiscal consolidation are spread across different levels of government.GoI’s fiscal consolidation efforts are also closely tied to its broader economic reforms agenda. By creating fiscal space, GoI can invest in critical areas such as digital infrastructure, RE and skill development, which are essential for India’s long-term economic competitiveness.On the whole, the budget presents a well-thought-out strategy for fiscal consolidation that balances multiple objectives. It aims to reduce fiscal deficit and government debt, while maintaining robust public investment in key areas. The flexible approach adopted in the budget recognises uncertainties in the global economic environment and allows for adaptability in policy response.

As India continues on its path to becoming a developed nation, prudent fiscal management, as outlined in this budget, will play a crucial role in achieving that goal.



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