Syllabus
GS Paper 3 – Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment. Inclusive Growth and issues arising from it.
Context
An in-depth examination of the government’s financial records reveals that the fiscal deficit is primarily due to insufficient revenues, rather than excessive spending.
Fiscal prudence:
- Fiscal prudence refers to the responsible and judicious management of a government’s financial resources. It involves maintaining a balance between public expenditure and revenue, ensuring that the government does not spend beyond its means.
- Fiscal prudence is crucial for the smooth operation of a government and its long-term fiscal stability. It involves making careful decisions about spending and investment to avoid excessive debt and ensure sustainable economic growth.
- This concept is particularly important in the context of a government’s fiscal policy, which involves decisions about taxation and spending to influence the economy. Fiscal prudence can help prevent economic instability, maintain investor confidence, and promote sustainable growth.
- In practice, fiscal prudence may involve measures such as efficient tax collection, careful management of public spending, and the use of fiscal rules or frameworks to guide policy decisions. It’s a key aspect of good governance and economic management.
Importance of Fiscal Prudence
- Stability in Fiscal Policy: Fiscal prudence helps maintain fiscal sustainability and macroeconomic stability, promoting economic growth and social welfare.
- Safety Net: It serves as a safety net to avoid fiscal crises, reduce public debt, and improve the quality of public spending.
- Effective Resource Mobilization: The government should not spend more than it earns, and should use its resources efficiently and effectively to promote the economic and social well-being of its citizens.
- Future Recovery Plan: The government should also plan for the future and be prepared for any shocks or uncertainties that may affect its fiscal position.
- Long Term Goals: Fiscal prudence involves making sound decisions regarding revenue generation, expenditure allocation, and debt management.
- Realistic Strategy: The government should have a clear strategy for raising revenues such as taxes, fees, or grants and for allocating expenditures such as public goods, services, or transfers according to its priorities and needs.
- Balanced Fiscal Deficit: A balanced fiscal deficit indicates that the government is living within its means and not relying too much on borrowing.
- Low Debt-GDP Ratio: A low debt-GDP ratio indicates that the government’s debt is manageable and not crowding out private investments or consumption.
- Quality of Expenditure: A high-quality expenditure indicates that the government is getting value for money and delivering results for its citizens.
India achieved fiscal prudence by enacting the Fiscal Responsibility and Budget Management (FRBM) Act in 2003, which set targets for reducing its fiscal deficit and debt-GDP ratio.
Indian Economy and Fiscal Prudence:
- Fiscal Deficit: The fiscal deficit target for 2024 is set at 5.9%, with a goal to reduce it to 4.5% by 2026. This is still higher than the 3% target specified in the FRBM Act, 2013.
- Debt-GDP Ratio: The NK Singh Committee recommended a debt-GDP ratio of 60% to be achieved by 2023, but the current ratio is about 81%. This indicates a high level of public debt and low revenues.
- Cost of Debt Servicing: India spends about 5.5% of its GDP on servicing public debt, which is more than the combined spending on health and education.
- Investment: Most of the debt is financed by household savings, which curtails private investment.
- Expenditure Profile: The majority of government spending is on interest payments, subsidies, and pensions, leaving little room for fiscal policy flexibility. However, the government has increased its capital expenditure from 12% to 22% of the total expenditure, which is considered to be productive and growth-enhancing spending.
- Revenue: Tax collection, especially GST, has been increasing over the years, but tax buoyancy remains low.
Recommendations for Fiscal Prudence in India
- Tax Reforms: Utilize technologies like Artificial Intelligence and Machine Learning to broaden the tax base and ensure compliance.
- Rationalize GST Slabs: Simplify the tax system by rationalizing GST slabs, reducing tax exemptions and rates to improve tax efficiency.
- Revisit Expenditure Composition: According to the Economic Survey 2020-21, the quality of expenditure can be improved by rationalizing subsidies, increasing capital expenditure, and adopting outcome-based budgeting.
- Sectoral Reforms: The government needs to initiate sectoral reforms, particularly in the power and informal sectors, to enhance the efficiency and performance of these sectors.
- Formalization: As per the World Bank, reforms in the informal sector include enhancing access to finance, social protection, and digital platforms.
Source: The Hindu
Practice Question
Discuss the concept of fiscal prudence and its importance in the context of the Indian economy. Critically evaluate the current fiscal policy of India in light of fiscal prudence. Suggest measures to improve fiscal prudence in India. (250 words)