The Finance Ministry has set a fiscal deficit target at 5.9 per cent for FY24 and envisages bringing it down to 4.5 per cent by FY26. Though the Centre has been successful in gradually bringing down the fiscal deficit from 9.2 per cent in FY21 to 6.4 per cent in FY23 despite the Covid-19 impact, it still has a long way to go if it has to achieve the target specified in the Fiscal Responsibility and Budget Management Act (FRBM, 2003), which is 3 per cent.
Targets for debt-GDP ratio too require a performance check. The NK Singh Committee, constituted in 2016, recommended a debt-GDP ratio of 60 per cent (Centre and States combined) to be achieved by FY23. The debt-GDP ratio, however, stands at about 81 per cent. These metrics suggest:
Firstly, India’s fiscal deficit has reached about 34 per cent of the estimated target (₹17.87-lakh crore) in four months of the current FY. Following the same trajectory, it would easily achieve its target of 5.9 per cent for the current fiscal year.
Secondly, when it comes to financing of deficit, data suggest that only about 1.2 per cent of the fiscal deficit is being financed externally (multilateral agencies, NRI depositors, international agencies, etc.) and a major part is being financed domestically (market borrowings, State provident funds, special deposits, etc). This negates any argument about dependence on international borrowings.
Thirdly, although the fiscal deficit has increased, the quality of expenditure has also increased — with about 22 per cent of the expenditure (FY22 AE) getting diverted towards capital expenditure (capex, including grants-in-aid). This is much more than the 12 per cent spent a few years ago and capex is expected to rise up to 30 per cent by FY24 BE.
A number of issues
Therefore, while concerns about the country’s fiscal health are not unwarranted, they are not as parlous as perceived by some. But does this mean nothing needs to be done? The answer is decidedly, No. There are a number of issues like:
The high cost of debt servicing is a serious concern. India spends about 5.5 per cent of its GDP on servicing public debt which is more than the combined spending on health and education. Moreover, most of the debt is financed by household savings which curtails private investment. Secondly, the country’s relatively sticky expenditure profile is a concern as the majority of the government spending is on interest payments, subsidies and pensions which leaves little room to manoeuvre. FY24 BE suggests that about ₹3.75-lakh crore would be spent on providing subsidies, that is, about 1.25 per cent of the GDP.
Low revenues are also an area of concern. A close look at the government’s accounts highlights that fiscal deficit is owing to low revenues and not high spending. For example, tax collection (especially GST) has been increasing over the years, still tax buoyancy is low. On the non-tax revenue side, a lot needs to be done by the Centre and State governments.
Hence certain measures could be adopted: tax reforms to achieve greater tax buoyancy; leveraging technology like AI-ML (artificial intelligence and machine learning), to increase the tax base and ensuring compliance. Rationalisation of the current GST regime’s multiple slabs is also suggested. For income tax, though the government revises its slabs and exemptions periodically, it somehow falls short of reaching the optimal level, hence fewer exemptions or lesser provisions with reduced tax rates could work.
The government should also revisit its expenditure composition. It can be argued that some schemes of the government have turned into legacy issues and cannot be done away with because of public buy-in. Though public welfare is the government’s duty, freebies promised by political parties in their election campaigns put tremendous pressure on the government exchequer.
Last but not the least, the government needs to initiate sectoral reforms most urgently in the power and informal sectors. Adaptive solutions as opposed to coercive ones ought to be the way forward. FRBM targets can be met sooner rather than later if fiscal discipline is followed in conjunction with the specific recommendations mentioned above.
Pokharna is Executive Director, and Jain is Research Associate, Pahle India Foundation