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This article was first published 9 years ago  » Business » India needs to create additional fiscal space: Economic Survey

India needs to create additional fiscal space: Economic Survey

Last updated on: February 27, 2015 14:33 IST
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Folk dancers of Chandigarh.India needs to create additional fiscal space to ensure macro stability and to create buffers for future economic downturns, said the Economic Survey tabled in Parliament by the Union Finance Minister Arun Jaitley in New Delhi on Friday.

Medium-Term Strategy

The Survey advocates a medium-term fiscal strategy to create this space. The space, it says, is necessary to insure against future shocks.

The recommended strategy would also take India closer in fiscal performance, to that of its emerging market peers.

The Survey outlines the two pillars of this medium-term strategy:

1. Reduce deficits

a. Reduce fiscal deficit over the medium term to the established target of 3% of GDP

b. Move towards the golden rule of eliminating the revenue deficit

c. Ensure thereby that borrowing over the cycle is only for capital formation

2. Expenditure Control and Expenditure Switching

a. Maintain a firm control on expenditures, in order to achieve the above targets

b. Improve quality of public expenditure; shift away from public consumption (by reducing subsidies) towards investment

Based on Fundamental Principles as well as History

The medium-term fiscal strategy is based on fundamental principles of fiscal policy, as well as on the need to maintain fiscal credibility.

The Survey invokes the following golden rule: Governments are expected to borrow over the cycle only to finance investment, and not to fund current expenditures. Short-term targets should be set accordingly.

This, the Survey argues, would assist the Government to take the Indian economy back to a durably higher growth path.

These considerations are reinforced by legacy and credibility issues.

Adhering to fiscal deficit target set earlier is essential to maintain credibility and provide policy stability.

The Survey explains how an analysis of India’s recent fiscal history too buttresses this strategy.

Need for Fiscal Action in short-term too

The Survey states that fiscal action cannot wait; it should continue in the upcoming year as well. It however adds that the need for accelerated fiscal consolidation has reduced, in view of reduced macroeconomic pressures.

Targets comfortably attainable

The Economic Survey assures us that concrete actions in the Union Budget to implement the medium-term fiscal strategy outlined above would lead to a comfortable attainment of the medium-term targets.

India can thus balance i) the short-term imperative of boosting public investment to revitalise growth, with the ii) need to maintain fiscal discipline.

Text: Kind courtesy, PIB; Image: Folk dancers of Chandigarh, Photograph: Reuters

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