India’s fiscal future: Lots done, more to do
Bank of India (RBI) to be 6.5% for the current year, which is exactly where it was in the last ‘normal’ year before the pandemic (i.e. 2018-19). This begs the question that if GDP growth is back at pre-pandemic levels, why is the central government fiscal deficit much higher (5.9% target for 2023-24 versus 3.4%)? The need to lower the deficit is well known.
India’s interest bill exhausts 45-50% of its annual net tax revenue. India also stands out on the global stage for its high interest bill, deficit and debt, despite its annual growth being much higher than the world average. The fiscal excesses will perhaps be more noticeable when a new private capex cycle begins, and competes for funding.
What caused the high fiscal deficit? It wasn’t the states, as their deficit hasn’t widened very much since the pandemic. Yes, their revenues fell sharply, but they cut expenditure and thereby limited any fiscal slippage. That leaves the central government.
To understand this better, we compare the central government’s finances in 2023-24 with 2018-19, the last ‘normal’ year before the pandemic. What we find is rather unexpected. While the capex bill has risen by 1.1% of GDP, current expenditure has increased by almost double that during that period.
So perhaps the drive for fiscal consolidation should be focused there. How can the central government’s fiscal deficit be lowered? First off, what does the central government’s fiscal deficit need to be lowered to? A useful goal, we believe, is to get the fiscal deficit back to the last normal pre-pandemic year’s level of 3.4% of GDP. This would mean almost 2.5 percentage points of GDP consolidation from 2023-24 levels.
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