7th September 2024 (8 Topics)
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Stick to Fiscal Deficit as the norm for Fiscal Prudence
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Context
The Finance Minister's final 2024-25 Union Budget outlines plans to reduce the fiscal deficit to 4.5% of GDP by 2025-26, aiming for a declining debt-GDP ratio post-2026-27. However, this move is seen as deviating from the Fiscal Responsibility and Budget Management (FRBM) 2018 targets, raising concerns about long-term fiscal prudence.
Fiscal Consolidation and Debt Management
- Importance of Fiscal Consolidation: Fiscal consolidation is crucial to ensure sustainable government debt levels and avoid excessive borrowing. By targeting a declining debt-GDP ratio, the government seeks to stabilize fiscal policy and maintain macroeconomic stability.
- Debt-GDP Ratio and Fiscal Deficit: The current fiscal deficit targets, set at 4.5% of GDP, may help in managing the debt-GDP ratio but do not specify clear long-term targets. This approach could lead to a gradual decline in the debt-GDP ratio without immediate stringent targets.
- Impact on Private Sector and Savings: With the government's high fiscal deficit, the investible surplus for the private sector may be constrained. Household financial savings have decreased, and high fiscal deficits might preempt private sector investment, limiting economic growth.
International Comparison and Challenges
- Global Context of Debt-GDP Ratios: Compared to international standards, India's interest payments relative to revenue receipts are high. Countries like Japan, the UK, and the US have lower ratios of interest payments to revenue, reflecting more manageable debt burdens.
- Historical Context and Current Trajectory: India’s debt-GDP ratio surged during the COVID-19 pandemic, and returning to pre-pandemic levels is proving challenging. The asymmetric adjustment path suggests difficulties in rapidly reducing debt while managing high interest payments.
- Need for Strict Fiscal Discipline: To ensure sustainable economic growth, India must adhere to a 3% GDP limit for fiscal deficit. A clear roadmap to achieve this target is essential to avoid fiscal imprudence and maintain investor confidence.
Practice Question
Q. What is the significance of fiscal consolidation in managing government debt and its impact on the broader economy?
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