Context: The fiscal deficit numbers announced in the budget (9.5% of the GDP), could increase risks.
Reasons for high fiscal deficits:
Need for government support: due to the contraction of the economy by 7.7 % which resulted in significant revenue loss.
Higher transparency: Government brought off-budget items related to subsidies under its books.
Outcomes of high fiscal deficits:
Increase the public debt: Even over 90 % of GDP in the current year.
Fifteenth Finance Commission’s (FFC’s) projected a general government debt to about 86 % of GDP by 2025-26.
Adversely affect the ability to take any countercyclical measures: in the case of a shock in the medium term.
Create a vicious cycle and increase risks to financial stability: If GDP growth falters, higher interest payments, along with a higher debt stock.
Increase risks to inflation.
Way forward: To avoid the above outcomes -
Increase tax-GDP ratio: Overall tax collection is at about 17 % of GDP in 2018-19 (same as the 1990s)
According to the FFC, the gap in India’s tax collection is over 5 % of GDP, compared to its potential.
Monetary Policy Committee (MPC) should take care of Inflation: By ensuring that the higher government spending does not end up fuelling inflation expectations.
Reserve Bank of India should protect financial stability more vigorously.
Government should revisit the fiscal management framework.