India's Post-Pandemic Fiscal Future

Business Standard     28th October 2021     Save    
QEP Pocket Notes

Context: Despite accelerated recovery, post pandemic economy faces multiple challenges and India needs a comprehensive strategy and vision to sail through the rough phase.

Precarious state of post-pandemic economy

  • Slower economic growth prospects: IMF expects India’s medium-term potential growth to be 6%.
  • Recovery in tax collection: As tax collection in current fiscal year is likely to exceed the Budget estimate by a significant margin.
  • Fiscal deficit normalisation: Higher tax collection would enable the government to increase growth-enhancing capital expenditure and help reduce the fiscal deficit to some extent.
    • Fiscal consolidation strategy: The Union government is targeting to contain the fiscal deficit at 6.8% of gross domestic product (GDP) in the current fiscal year, compared to 9.5% last year.
    • Union government has said that the fiscal deficit will be brought down to 4.5% of GDP by 2025-26.
  • Higher public debt levels: The general government debt has increased to about 90% of GDP and, according to International Monetary Fund (IMF) projections, it will remain above 85% of GDP by 2026-2027, which would be over 10% higher than the pre-Covid level.

Way Forward: Government will need to work on both revenue and expenditure fronts to attain faster consolidation without hurting growth prospects

  • On the revenue side: Government need to systematically address low and stagnant tax-to-GDP ratio.
    • GST reforms: Simplification of processes and adjustment of rates to the revenue-neutral level, need to be addressed immediately.
    • Reduce the dependence on high fuel taxes to fund government expenditure, which may not be sustainable in the medium term.
    • The direct tax system needs to be reviewed as well to increase the tax base.
    • Government will need to aggressively push the disinvestment programme to raise resources.
  • On the expenditure side – Improving quality of expenditure: As per RBI, share of revenue deficit in gross fiscal deficit has been around 70% for the Central government, this need to be reduced and redirected towards capital investment.
  • Aggressively push reforms to attain higher sustainable growth: Since both private and public sector expenditure is likely to remain constrained for some time, India must focus on exports for higher growth.
    • Exports as a percentage of GDP slipped from about 24% in 2008 to about 18% in 2020. The government should focus on convincingly reversing this trend.
QEP Pocket Notes