Active Stocks
Mon Dec 11 2023 15:59:37
  1. Tata Steel share price
  2. 130.05 0.66%
  1. ICICI Bank share price
  2. 1,017.05 0.6%
  1. HDFC Bank share price
  2. 1,650.75 -0.14%
  1. Bharti Airtel share price
  2. 997.45 -0.21%
  1. State Bank Of India share price
  2. 614.35 0.06%
Business News/ Opinion / Views/  It is time to make fiscal compression a priority
Back Back

It is time to make fiscal compression a priority

The government should get its finances in better shape as India’s post-pandemic economic challenges shift. Notably, both Bibek Debroy and the IMF have weighed in on its urgency

Bibek Debroy, chairman of the Economic Advisory Council to the Prime MinisterPremium
Bibek Debroy, chairman of the Economic Advisory Council to the Prime Minister

Bibek Debroy, chairman of the Economic Advisory Council to the Prime Minister, has voiced himself firmly in favour of medium-term fiscal consolidation. In an interview with Mint, Debroy said this ought to be a priority in the upcoming budget and the government should clearly convey a credible plan to achieve it over the next few years. While the Centre has said it will tighten its fiscal deficit to 4.5% of GDP by 2025-26 (it is budgeted at 6.4% this year), anxiety has been aired over this being too big a target. “There must be a credible plan to reduce it, a credible plan to persuade the rest of the world that India is serious about fiscal consolidation," Debroy said, “because otherwise, debt will not be sustainable." Indeed, we need the state to borrow less and free up budget space weighed down by a heavy interest burden. As we put pandemic disruptions behind us that bent both demand and supply in peculiar ways, we also need to contain repercussions of a fiscal bloat on our cost of living. A tighter belt is a doubtless must. The extent of it is in question.

The ravages of covid are not fully behind us yet. Last week’s decision to extend free food handouts that began as a welfare measure after the virus struck India was a sign of its lasting effects. Social spending cutbacks are unlikely for other reasons, too, such as general elections due in 2024. The most significant ramp-up in government expenditure in recent years has been on infrastructure projects and the like, which are expected to get a large outlay for 2023-24. As in past budgets, the income multiplier effect of capex will likely be deployed as a growth prop for yet another year. The recovery of our economy is not robust enough for private forces to lead an upsurge, as this year’s readings suggest, and next year could bring adverse spillovers from global economic stagnation. A sharp reduction in capital spending next year would then be too risky. This agenda, however, must be weighed against government debt ruling above 80% of GDP, which at high emerging-market rates of interest is near its danger level after which paying back can turn into a back-breaker. Should inflation or other factors force those rates to go up along an entire curve of yields on government bonds, this debt squeeze of coffers would worsen. Already, the Centre’s allocation for its interest bill takes up roughly half its revenues. We cannot have debt soaking up more money, leaving us with less to spend. While revenue expansion could come to next year’s budget aid, for a substantial slash in the fisc, the Centre should go in for asset sales at a scale unseen before. It will also have to cut some subsidies and spending heads that have proven politically sticky for decades. Tax reforms could chip in too, especially since direct levies have not kept pace with our swelling indirect-tax mop-ups, a regressive shift that is arguably in need of containment. As Debroy suggests, perhaps this budget could come up with incentives for income taxpayers to embrace a liability option that’s free of exemptions.

While India’s need for fiscal compression is widely agreed upon, its speed remains under debate. Given the risks of a delayed return to normalcy after a major rescue or stimulus exercise, the Centre should consider going faster than its currently outlined glide path towards 2025-26. A more ambitious approach has also been advised by the International Monetary Fund. Advancing the 4.5% of GDP target to 2024-25 and aiming for 5.5% next year may quell concerns that our path is too lax.

Milestone Alert!
Livemint tops charts as the fastest growing news website in the world 🌏 Click here to know more.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 26 Dec 2022, 10:22 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App