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Fiscal Framework: Ntroduction AND Ummary

The document discusses lessons from India's recent fiscal performance and provides recommendations for fiscal policy going forward. It concludes that India must meet its medium-term fiscal deficit target of 3% of GDP to provide fiscal space and move closer to peers. It must reduce the revenue deficit and ensure borrowing is only for capital formation. This can be achieved through expenditure control and switching spending from consumption to investment. In the upcoming year, accelerated consolidation is less urgent due to reduced macroeconomic pressures, but fiscal credibility and medium-term goals still require maintaining discipline.

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Sagargn Sagar
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51 views1 page

Fiscal Framework: Ntroduction AND Ummary

The document discusses lessons from India's recent fiscal performance and provides recommendations for fiscal policy going forward. It concludes that India must meet its medium-term fiscal deficit target of 3% of GDP to provide fiscal space and move closer to peers. It must reduce the revenue deficit and ensure borrowing is only for capital formation. This can be achieved through expenditure control and switching spending from consumption to investment. In the upcoming year, accelerated consolidation is less urgent due to reduced macroeconomic pressures, but fiscal credibility and medium-term goals still require maintaining discipline.

Uploaded by

Sagargn Sagar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Fiscal Framework

02
CHAPTER

2.1 INTRODUCTION AND SUMMARY


Santayana once warned that those who ignore
history are condemned to repeat it. For that
reason, its worth examining Indias recent fiscal
past, to see if there are lessons for the countrys
future fiscal trajectory. A look back at recent
history is especially warranted now because India
today is in a very similar situation to that in the
early 2000s, with comparable fiscal deficit (4
percent of GDP) at a broadly similar state of the
macroeconomic cycle. Today, like then, inflation
is close to 5 percent. Today, like then, the current
account deficit is manageably low. And, today,
like then, the economy is poised to attain a faster
growth trajectory.
So, it is worth asking: What are the lessons from
recent fiscal performance in India? How should
they inform fiscal policy in this years budget and
for the medium term? This chapter attempts to
answer these questions. The major conclusions
are:
First, in the medium term, India must meet its
medium-term fiscal deficit target of 3 percent of
GDP. This will provide the fiscal space to insure
against future shocks and also to move closer to
the fiscal performance of its emerging market
peers. It must also reverse the trajectory of recent
years and move towards the golden rule of
eliminating the revenue deficit and ensuring that,
over the cycle, borrowing is only for capital
formation.
Second, the way to achieve these targets will be
expenditure control, and expenditure switching
from consumption to investment. The loss of

expenditure control and hence fiscal space


contributed to the near-crisis of 2013. From
2016-17, as growth gathers steam and as the GST
is implemented, the consequential tax buoyancy
when combined with expenditure control will
ensure that medium term targets can be
comfortably met. This buoyancy is assured by
history because over the course of the growth
surge over the last decade, the overall tax-GDP
ratio increased by about 2-2.5 percentage points
with some but not radical increases in the tax rate
and base.
Third, in the upcoming year, the pressures for
accelerated fiscal consolidation have been
lessened because macro-economic pressures
have significantly abated with the dramatic decline
in inflation and turnaround in the current account
deficit. In these circumstances, especially if the
economy is recovering rather than surging, procyclical policy will be less than optimal.
Moreover, growth will ensure favourable debt
dynamics going forward which alleviates
consolidation compulsions emanating from
concerns about public sector indebtedness.
Further, accelerated fiscal consolidation will also
be limited in the upcoming fiscal year by a number
of new and exceptional factors, such as
implementing the recommendations of the
Fourteenth Finance Commission, clearing the
compensation obligations to the states for the
reduction in the central sales tax in 2007-08 and
2008-09, and the need to modestly ramp-up
investment.
Finally, nevertheless, to ensure fiscal credibility
and consistency with the medium-term goals, the

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