India's Fiscal Policy Challenges
Government expenditures significantly exceed revenues, leading to large fiscal deficits.
Persistent deficits increase government debt. For example, debt-GDP ratio is expected to be 54% by 2025-26.
High debt leads to substantial interest payments, which consume a large portion of revenue.
Interest payments have risen to around 38.4% of revenue receipts recently.
High government borrowing limits the funds available for private sector investment, potentially stunting economic growth.
Household financial savings have decreased, exacerbating the funding challenges for both government and private sectors.
COVID-19 caused a rapid increase in debt-GDP ratio, and returning to pre-pandemic levels is proving challenging.
Way Forward
Aim to lower the fiscal deficit to 3% of GDP to provide more room for private investment and stabilize debt levels.
Establish and communicate a clear target and path for reducing the debt-GDP ratio in line with fiscal responsibility frameworks.
Increase government revenues through reforms and improved tax collection to reduce dependence on borrowing.
Focus on rationalizing government expenditures, prioritizing essential spending while cutting wasteful expenditure
Implement policies to increase household financial savings, such as incentives for savings and investments
Adhere strictly to fiscal responsibility norms to avoid slippage and ensure long-term fiscal stability
Promote economic growth through structural reforms and investments in infrastructure to improve revenue collection and reduce debt relative to GDP
COMMENTS