The International Monetary Fund’s (IMF’s) latest Fiscal Monitor, a publication on the state of public finance in countries, says India has made modest improvement in containing fiscal deficit and suggests that “growth-friendly fiscal consolidation should continue by reorienting public expenditure away from untargeted subsidies, especially on food and fertilizers, and toward capital and social spending". It also advises that the government should continue to raise taxes on petroleum products while oil prices remain low.
All this is fine and along expected lines. IMF’s projections on the combined fiscal deficits of the Indian central and state governments show a slow yet steady reduction, as the chart shows. What’s interesting, though, is that this isn’t achieved by a higher government revenue to gross domestic product (GDP) ratio—indeed, the chart indicates that general government revenue as a percentage of GDP is expected to decline a bit in the next couple of years.
How then is the fiscal deficit projected to come down? By compressing expenditure. A look at the chart shows that general government total expenditure, or the combined expenditure of the central and state governments is expected to decline modestly, as a percentage of GDP, in the next couple of years.
If this is indeed what will happen, then the private sector will have to pick up the baton of economic growth, as support from the government wanes.