The future of fiscal consolidation in India

The future of fiscal consolidation in India under alternative assumptions, bearing in mind the growth and fiscal consolidation objectives, is the focus of this article. Alternative scenarios are formulated focusing on sustainable combinations of fiscal deficit and government debt relative to gross domestic product, providing guidance on how the Union Fiscal Responsibility and Fiscal Management Act 2018 can be recast.

After the deleterious effect of COVID-19, which consumed almost two full years of 2020–21 and 2021–22, the Indian economy looks set to return to normal from 2022–23. According to the Office for National Statistics (ONS) Second advance estimates of national income published on February 28, 2022, the nominal and real magnitudes of gross domestic product (GDP) at `236.4 lakh crore and `147.7 lakh crore in 2021–22 are both higher than their corresponding levels in 2019–20 at ` 200.7 lakh crore and `145.2 million dollars. In the two intervening years of 2020-21 and 2021-22, the Union government budget deficit had soared to 9.2% and 6.9% of GDP, respectively. As a result, the combined budget deficit of the Union and the States in these two years is estimated at 13.8% and 10.3% of GDP, respectively.1

As a result, the combined debt-to-GDP ratio and that of the Union have increased significantly. Indian policymakers are now faced with the task of healing the economy to accelerate growth while restoring fiscal consolidation. In fact, reaching sustainable levels of debt and deficit and optimizing growth are interdependent. In this article, we examine the future of fiscal consolidation in India, drawing a perspective for general government and union governments and, by implication, all state governments. To this end, it is worth starting with the Union Government’s 2022-2023 budget, which clearly signals a return to fiscal consolidation, while focusing on infrastructure expansion to lay the foundations for a robust long-term growth.

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