Handle Debt with Care

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.