From Fragile Five to First Five: India's journey of fiscal consolidation

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Subscribe to enjoy similar stories. Fiscal discipline is a cornerstone of economic stability for any country, and India is no exception. In an era of escalating geopolitical uncertainties and changing trade dynamics, maintaining fiscal discipline has become increasingly critical to shield economies from external shocks and ensure confidence among global investors.

India realized the importance of a controlled fiscal deficit when India was declared as one of the ‘fragile five’ in 2014, as India’s deficit touched 5% of GDP in one of the quarters (in addition to the weakening of other economic fundamentals). Global pundits and market analysts predicted a state of doom and India was stamped as a lost story. But India turned around its story by quickly working towards building a strong economic foundation.

While focusing on all economic parameters made sense, bringing the fiscal deficit down was key since it significantly influences all other parameters. Subsequently, in the budget for 2014-15, measures were taken towards fulfilling the commitment set in the new FRBM regime, where revised targets were set for various fiscal indicators. The government brought down the fiscal deficit through fiscal consolidation from 4.5% of GDP in FY 2013-14 to 3.4% of GDP in FY 2018-19.

Reduced fiscal deficit helped bring inflation down and increased domestic savings. Considered an indicator of a country’s viability and stability as an investment destination, foreign capital inflows improved, and the currency remained stable. Consequently, increased investments helped capacity building, thereby reducing reliance on imports, and increasing export competitiveness, all of which led to improved trade balance.