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The baton over to the private sector
Context:
Implementing significant fiscal consolidation in an election year is a bold and necessary move that deserves commendation.
Rethinking Fiscal Policies Post-Pandemic:
- Over-Correction in Advanced Economies: Post-2008, advanced economies over-corrected fiscal policy post-pandemic, causing prolonged inflation and aggressive monetary tightening.
- US Case Study: The US exemplifies the challenge, with an expanding fiscal deficit amidst efforts to control inflation, leading to conflicting policy actions.
- Shift to Counter-Productive Fiscal Policy: The lesson learned is that counter-cyclical policies must be symmetrical; otherwise, fiscal interventions can become counter-productive.
India's Fiscal Consolidation Imperative:
- Divergence in India's Cyclical Position: Despite strong growth, India's fiscal consolidation was crucial due to elevated starting points and its impact on public debt sustainability.
- Concerns About Debt Dynamics: The signal sent by the increasing public debt to GDP ratio emphasizes the need for fiscal consolidation to avoid adverse debt dynamics.
- Operational Challenges: Maintaining elevated fiscal deficits would require consistently high real growth, leaving little ammunition for future shocks in a volatile global environment.
Commendation and Future Strategies:
- Commendation for Fiscal Consolidation: The interim budget receives commendation for front-loading fiscal consolidation, with lower deficits than market expectations.
- Shift in Focus to Growth Extraction: The focus should now shift to extracting the least growth-costly fiscal consolidation by emphasizing revenue generation over expenditure compression.
- Principles for Sustainable Consolidation: Prioritize raising revenues, incorporate strategic asset sales, preserve key sectors like health and education, and ensure capex growth while reducing deficits.
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