8th February 2024 (9 Topics)
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Road map for fiscal consolidation
Context
The interim Budget for 2024-25 adhered to the tradition of maintaining existing tax rates for both direct and indirect taxes. The budget emphasized two main points: the continuation of increasing capital expenditures by the Union government and a sustained focus on fiscal correction and consolidation.
Capital Expenditure Emphasis:
- Continued Government Investment: The budget reflects a trend of heightened capital expenditures by the Central government, possibly driven by the need to stimulate investment amidst global uncertainties, including the COVID-19 pandemic.
- Growth Rates Analysis: While the interim budget indicates an 11.1% increase in capital expenditures compared to the 2023-24 Budget Estimates, the growth rate is lower than initially planned. This lower growth rate aligns with the real GDP growth of 7.3% in 2023-24.
- Potential Impact on GDP Growth: The projected 17% growth in capital expenditure for 2024-25 suggests the potential for achieving a 7% real GDP growth if private sector investment momentum is sustained and state governments maintain their capital expenditure growth, supported by government initiatives such as interest-free loans.
Fiscal Deficit and Consolidation:
- Fiscal Deficit Projection: The fiscal deficit for 2024-25 is forecasted to decrease to 5.1% of GDP, a 0.7 percentage point decline from the previous year, aligning with the Finance Minister's earlier statements.
- Targeted Fiscal Deficit Levels: There is a stated goal to maintain the fiscal deficit at 3% of GDP for the Central government, and collectively with State governments, not exceeding 6% of GDP. This target is seen as crucial for maintaining economic stability and avoiding inflationary pressures.
- Debt-GDP Ratio and Long-term Fiscal Planning: A debt-GDP ratio target of 40% for the Centre by 2028-29 is proposed, aligned with a sustained fiscal deficit of 3% of GDP. The rationale behind these targets is linked to household savings, inflation control, and sustainable economic growth.
Proposed Debt-GDP Ratio Target:
- Long-Term Fiscal Planning: The government proposes a debt-GDP ratio target of 40% for the Centre by 2028-29, signaling a strategic vision for sustainable fiscal management over the long term.
- Rationale for Targets: Ensuring Economic Stability: These targets are rooted in the goal of ensuring economic stability by maintaining sufficient household savings, curbing inflationary pressures, and fostering sustainable economic growth.
- Challenges and Implementation: Coordination and Implementation Hurdles: Achieving these targets will necessitate meticulous coordination and implementation, considering the dynamic nature of economic conditions and potential challenges in sustaining fiscal discipline amidst evolving global and domestic factors.
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