Towards fiscal consolidation

(MainsGS3:Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.)

Context:

• In the Union Budget for 2023-24, Finance Minister Nirmala Sitharaman chose the path of relative fiscal prudence and projected a decline in fiscal deficit to 5.9% of gross domestic product (GDP) in FY24, compared with 6.4% in FY23.

Direction on fiscal deficit:

• In Union Budget 2023-24, the fiscal deficit to GDP is pegged at 5.9% in FY24 thus this ratio has declined from 6.4% in 2022-23 (revised estimate) and 6.7% in 2021-22 (actual).
• In the revenue budget, the deficit was 4.1% of GDP in 2022-23 (revised estimate) and in Union Budget 2023-24, revenue deficit is 2.9% of GDP. 
• If interest payments are deducted from fiscal deficit, which is referred to as primary deficit, it stood at 3% of GDP in 2022-23 (RE).
• The primary deficit, which reflects the current fiscal stance devoid of past interest payment liabilities, is pegged at 2.3% of GDP in Union Budget 2023-24.

Rationalisation of subsidies:

• The major allocations that have been pared down are food, fertilizer and petroleum subsidies. 
• The food subsidy in 2022-23 (RE) was ₹2,87,194 crore. In 2023-24, it has been reduced to ₹1,97,350 crore. 
• Similarly, the fertilizer subsidy in 2022-23 was ₹2,25,220 crore (RE); it has been reduced to ₹1,75,100 crore for FY24. 
• The petroleum subsidy in 2022-23 was ₹9,171 crore (RE); it has declined to ₹2,257 crore in 2023-24 (Budget estimate/BE).
• Rationalisation of subsidies is important so that the government can move towards reaching a fiscal deficit target of 4.5% by 2025-26.

Boosting growth:

• The interest rate management by the RBI through inflation targeting alone cannot effectively control inflation, given the supply side shocks, therefore, fiscal policy measures are crucial to tackle mounting inflation. 
• Policy coordination between RBI and North Block is crucial for a sustained growth recovery process. 
• The RBI has been increasing policy rates to tackle mounting inflation but a high interest rate regime can hurt the economic growth process. 
• So, the fiscal policy needs to remain “accommodative” with focus on gross capital formation in the economy with enhanced capital spending, especially infrastructure investment. 
• In Budget 23-24, capital spending is expected to rise to 3.3% of GDP. The interest-free loan of ₹1.3 lakh crore for 50 years provided to States should help them spend and boost growth.

Credit rating agencies:

• According to Moody’s, leveraging buoyant revenue, the Government plans to substantially increase spending on infrastructure, while cutting personal income taxes, and providing capital support for the oil sector. 
• The Budget plans are credit positive for renewable energy companies, cement and steel producers, oil marketing companies and automakers in particular, it said.
• While continued gradual fiscal consolidation contributes to the stabilisation of the government’s debt burden and supports credit quality, authorities remain unlikely to achieve their ambitious target to narrow the deficit to 4.5% of GDP by FY26, Moody’s added. 
• According to Fitch Ratings, the slow fiscal consolidation process in the wake of the pandemic could leave public finances exposed in the event of further major economic shocks.

Conclusion:

• This year's budget is focusing on economic growth recovery through capex to boost infrastructure investment and private investment.