Shifting goalposts for fiscal stability

GoI will transition from fiscal deficit targeting to debt path surveillance, which offers a more stringent approach to tackling public debt. Fiscal deficit could decline while the debt position turns adverse. But falling public debt will necessarily lower the fiscal debt. GoI is signalling its resolve to reach and sustain fiscal balance by benchmarking against the tougher hurdle. It also expects to do this after having corrected most of the slippage on account of the Covid disruptions. This is a remarkable accomplishment considering emerging economies were expected to achieve their pre-pandemic fiscal equilibrium after advanced economies. India has fortunately shown the pundits wrong on that count. It can now raise its ambitions to target a fiscal band while ensuring the debt-GDP ratio shrinks.

There is no justification for a desirable fiscal deficit rate, most widely accepted as 3%. The number emerged from negotiations for entry into the EU and may not be apt for emerging economies amid structural adjustments. A fiscal band allows government expenditure greater flexibility over a rolling horizon while keeping the broader context of public debt in the picture. This facilitates stability in the capital market where GoI is the biggest borrower. GoI intends to maintain its capex tempo, and a multi-year borrowing plan should make it easier for private investment to crowd in. RBI also acquires greater independence in pursuing its monetary targets while managing GoI’s debt.

India stands somewhere in the middle of the emerging economy pack in terms of indebtedness. Bringing debt within the target will not involve an inordinate growth sacrifice for the country. The gov will, however, have to build on the recent success in revenue mobilisation through a simpler tax administration. The finance ministry is undertaking a review of direct tax laws. Direct taxes will have to acquire the revenue mobilisation efficiency on display in GST.