Why the budget must prioritise incentives, not just resources

India's current macroeconomic policy are focusing on fiscal challenges, slowing government spending, and the need for structural reforms to boost investment and growth. It reflects on the effects of the pandemic and the government’s fiscal stance in the face of a global and domestic slowdown, considering the future fiscal priorities for the Indian economy.

Government Spending and Fiscal Policy

• Slowing Government Capital Expenditure: As of November, the Centre has spent only 46.2% of its capital expenditure target, down from 58.5% in the previous year. States have similarly underutilized their capital expenditure allocation.
• Fiscal Consolidation and Deficit Concerns: India's combined fiscal deficit stands above 7% of GDP, one of the highest globally, with interest payments consuming 19% of the Centre's expenditure. Hence, there is a pressing need for fiscal consolidation to build fiscal space and reduce debt risks.
• Countercyclical Fiscal Policy: To stimulate growth, it is essential for the government to meet its capital expenditure targets while also focusing on reducing the fiscal deficit. Efficiencies in spending and incentivizing investment are crucial.

Investment and Private Sector Challenges

• Private Investment Constraints: Despite tax cuts, private corporate investment has remained stagnant. Corporate savings have increased significantly, but the fixed capital formation rate has declined, indicating a gap between available resources and actual investment.
• Utilizing Domestic and Foreign Savings: India faces a dual issue of underutilized domestic savings and foreign savings, with inflows exceeding the current account deficit. Therefore, the constraint is not a lack of resources but the lack of effective investment.
• Tax Reforms and Corporate Strategy: A proposal for a tax on non-business income, offset by investment credits, could encourage more investment. Additionally, addressing income tax issues and simplifying the tax structure should remain a priority for better resource allocation.

Agricultural and Structural Reforms

• Agricultural Marketing Reforms: Many states have adopted private markets and allowed direct farm gate sales, but only 14 states have notified the necessary rules. Agricultural supply chain development is critical for improving farmer income and food supply.
• Food Supply and Regulation: As food consumption patterns evolve, with rising demand for processed foods, simplifying agricultural regulations and coordinating better with states can improve food supply chains and reduce price spikes.
• Reform Implementation at the Ground Level: Despite the Centre’s efforts to simplify laws, businesses continue to face challenges at the local government level. More effective implementation at state and local levels is necessary for successful reforms.

Practice Question

Q: Evaluate the effectiveness of India's current fiscal policy in addressing the macroeconomic slowdown. Discuss the role of government expenditure, structural reforms, and investment incentives in shaping India’s economic recovery.