Could ‘two-factor authentication’ in India's fiscal policy be a masterstroke?

livemint.com:

The 3% fiscal deficit target: Is it sacrosanct? Irrespective of how the data is sliced, India’s public debt position is weak for a country of its size and potential. Of countries in the BBB category, India has the highest fiscal-deficit-to-GDP and the third-highest general-government-debt-to-GDP ratios. Among large emerging markets, its debt-to-GDP metric is much higher than that of Thailand, Mexico, Philippines, and closer to below-investment-grade Brazil.

A conscious commitment to reducing debt could give India the ratings upgrade that has eluded it so far. Timing is key to successful fiscal consolidation. It’s easier to reduce debt and prune fiscal deficits in a boom.

This is due to two reasons. One, growth in tax revenues is buoyant in high-growth periods. Note how the tax-to-GDP ratio jumped from 10% in 2019-20 to 11.7% in 2023-24, riding on the post-pandemic recovery.

Two, the debt-to-GDP ratio drops when nominal GDP grows faster than debt, which is more likely during a boom. A fast-growing economy can take on more debt while remaining on its target debt-to-GDP path. This is critical for India, which needs to borrow to fund capital expenditure.

For instance, if the aim is to reduce the debt-to-GDP ratio by 1 percentage point each year until it reaches 50%, an 8% real growth rate would allow this to be achieved with higher debt than a 6% growth rate. In other words, faster growth provides greater room for debt without eroding fiscal consolidation. Ideally, fiscal policy should be countercyclical – that is, fiscal deficits should increase when economic growth slows, and vice versa.