Does India’s fiscal profile need a facelift?
Subscribe to enjoy similar stories. Policymaking is all about trade-offs. The upcoming budget faces an acute policy trade-off between nurturing the fading growth and diminishing fiscal space with challenging debt dynamics.
At the same time, renewed uncertainties around global markets and ensuing tighter financial conditions would also weigh on the fiscal reaction function. The role of fiscal policy becomes more crucial in the current cyclical slowdown, as part of the growth hit has been attributed to tighter fiscal and monetary stance in general, while private economic agents (consumption and investment) have also stayed less robust or missing. The policy aim thus is to ensure keeping the overall expenditure-to-GDP ratio healthy, with high revenue expenditure (revex) and healthy capital expenditure (capex) spending.
Even as additional support to some segments of the economy is warranted, a delicate balance needs to be maintained, ensuring the fiscal impulse is maximized to boost potential growth. However, all of this would still have to be achieved while adhering to the medium-term fiscal sustainability. This further puts pressure on front-loaded investment-focused stimulus to stay an important source of growth, especially given its larger multiplier effect on growth and employment.
To be sure, this clearly has been the Centre’s strategy post covid, with FY25 central capex budgeted to be rising by almost 1.7 percentage points of GDP since FY20 at 3.4%. However, FY25 so far seems to have seen much slower capex than budgeted (a phenomenon seen in election years). While most key sectors will likely catch up to the budgeted targets, sectors like defence, new schemes under economic affairs, and telecommunication (BSNL recap)
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