Fiscal Challenges and Recommendations for India
Fiscal Deficit and Capital Expenditure
The fiscal deficit target of approximately 3% of GDP set by the IMF for India's central government is challenging. This difficulty arises due to the inclusion of capital expenditure from state-owned enterprises (SOEs) in the central budget.
IMF's Fiscal Strategy Suggestion
- The IMF suggests a combined fiscal deficit (Centre + states) of under 6% of GDP for the medium term.
- This goal, along with increased infrastructure spending, requires eliminating the revenue deficit, which the Indian authorities find unfeasible in the short term due to growth compromise concerns.
Revenue Mobilisation and Tax Reforms
The government agrees on the necessity for better revenue mobilisation. Their strategy includes:
- Supporting voluntary tax compliance by simplifying tax laws.
- Digitising tax administration to enhance efficiency.
Debt Management and Fiscal Consolidation
- The Indian government and the IMF recognize the need for medium-term fiscal consolidation but favor a gradual approach due to global uncertainties.
- Public debt risks are mitigated by long-dated, fixed-rate, domestic currency-denominated debt held by residents.
Union Budget and Fiscal Anchor
The Union Budget introduces a new debt-to-GDP ratio fiscal anchor, aiming to reduce it from 57.1% in FY25 to 50% by FY31.
- The FY26 target is set at 56.1% with an assumed nominal GDP growth of 10.1%.
- The IMF suggests including state government debt in the fiscal strategy.
Recommendations for Fiscal Policy
- Revamping the Fiscal Responsibility and Budget Management (FRBM) Act to include medium-term macroeconomic projections.
- Implementing a revenue-based consolidation strategy with a focus on growth-enhancing expenditure.
- Enhancing revenues through GST simplification, undoing declines in the effective GST rate, reversing fuel excise cuts, and broadening the income tax base.
Expenditure Rationalization
- Better targeting of subsidies and replacing them with cash transfers to save fiscal resources.
- Rationalizing the number of expenditure schemes to achieve cost savings.
