Should the budget stray from straight and narrow path of fiscal consolidation?

With a high structural fiscal deficit, the government needs to be wary of the siren calls of straying from the straight and narrow path of fiscal consolidation


Finance minister Arun Jaitley. Photo: Abhijit Bhatlekar/Mint
Finance minister Arun Jaitley. Photo: Abhijit Bhatlekar/Mint

With the Union budget around the corner and given the slowdown in the economy, many economists have been pushing for a pause in the fiscal consolidation programme of the central government.

The chart, taken from the recently published World Bank’s Global Economic Prospects, shows that India’s structural fiscal balance as a percentage of potential gross domestic product (GDP) is the highest among our neighbours (the deficit shown here is the combined deficit of the centre and states).

According to the International Monetary Fund (IMF), the structural budget balance is the government’s actual fiscal position purged of the estimated budgetary consequences of the business cycle, and is designed in part to provide an indication of the medium-term orientation of fiscal policy.

With such a high structural fiscal deficit, the government needs to be wary of the siren calls of straying from the straight and narrow path of fiscal consolidation.

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