EDITORIAL ANALYSIS : Balance fiscal consolidation with growth  

Source: The Hindu

• Prelims: Indian Economy(GDP, GVA, fiscal policy etc)
• Mains GS Paper III: Fiscal policy, Monetary policy, GDP, Issues related to planning etc.

ARTICLE HIGHLIGHTS

• The supply of critical imports were disrupted by the Russia Ukraine war and the prices of such imports increased sharply, derailing many economies.

INSIGHTS ON THE ISSUE

Context

Fiscal policy:

• The fiscal policy is concerned with the raising of government revenue and Government Budget increasing expenditure.
• To generate revenue and to increase expenditures, the government finance or policy called Budgeting policy or fiscal policy

The major fiscal measures are:

• Public Expenditure
• Taxation
• Public Borrowing

India’s economic condition:

• India’s performance was relatively better than many other countries, the return to normalcy has been delayed.
• India’s GDP at the end of the present fiscal year will only be 57(eight point five seven)% higher than its level in 2019-20, giving an average of 2.86% for three years.

Growth performance:

• Real Gross Value Added (GVA)(2002-23):It is estimated to grow by 7(six point seven)%.
  • sectoral decomposition indicates that every output sector has turned positive as compared to the corresponding magnitudes in the pre-COVID-19 year of 2019-20.
• Nominal GDP(2023-24): It may be close to ₹300 lakh crore.
  • Real growth in the second half of 2022-23 is only 5(five point five)% as per the advance estimates.
• The policy response to the COVID-19 shock: There was a sharp increase in the Centre’s fiscal deficit to 2(nine point two)% of the GDP.
  • More than three times the original Fiscal Responsibility and Budget Management Act (FRBM) norm of 3%.
• Fiscal deficit: In the two succeeding years, the fiscal deficit could be reduced to 7(six point seven)% and 6.4(six point four)%, respectively.

Challenges to India’s growth prospects:

• The Organization for Economic Co-operation and Development(OECD): It has projected a growth rate of 2(two point two)% for the global economy in 2023
  • India: 5.7(five point seven)% in 2023-24.
• The International Monetary Fund:
  • Global growth: 2.7(two point seven)%
  • India’s growth: 1(six point one)%.
• India may be able to achieve a growth in the range of 6-6.5(six point five)% in 2023-24, provided significant policy support is given to growth.

India’s Fiscal prospects:

• Growth in the Centre’s Gross Tax Revenues (GTR) in 2023-24 would be less than that in 2022-23.
  • Because of an expected fall in both real GDP growth and deflator-based inflation.
• Together with non-tax revenues and non-debt capital receipts: total resources available to the Central government would be nearly ₹28.3(twenty eight point three)lakh crore.

Way Forward

• With 2023-24 being the first genuine post COVID-19 normal year: It would be best to spell out a convincing path towards the prescribed fiscal deficit ratio of 3%.
  • This calls for a total adjustment of 3.4(three point four) percentage points of GDP.
• The need for correction in the government’s fiscal deficit because of the relative profile of savings and investment as a proportion of GDP.
• Financial savings along with net inflow of foreign capital provide the extent of surplus available for the potential net deficit sectors in the economy.
• Target a reduction of 0.7(zero point seven)% point in fiscal deficit in 2023-24 compared to 2022-23
  • The resultant fiscal deficit of 7(five point seven)% of GDP would imply availability of investible resources of 1.1(one point one)% of GDP for both the private corporate sector and the non-government public sector.
• Finance by household sector financial savings of about 8% of GDP and net inflow of foreign capital of 3(two point three)% of the GDP.
  • It will not put any additional pressure on interest rates
  • It would be ideal for sustaining a robust medium-term growth with price stability.
• Bringing down fiscal deficit and charting out a glide path are essential for maintaining price stability.
  • The pressure on the Reserve Bank of India (RBI) to expand reserve money will come down.
• A careful calibration would be required for limiting revenue expenditure growth in order to retain space for capital expenditure to grow adequately with a view to supporting growth

QUESTION FOR PRACTICE

Explain the difference between combusting methodology of India’s Gr Domestic Product (GDP) before the year 2015 and after the year 2015.(UPSC 2021) (200 WORDS, 10 MARKS)

Do you agree that the Indian economy has recently experienced recovery ? Give reasons in support of your answer.(UPSC 2021) (200 WORDS, 10 MARKS)