On Issues with India’s Public Finance – Strategic thinking in public finance

Source: This post on issues with India’s public finance has been created based on the article “Strategic thinking in public finance” published in “Business Standard” on 2^nd February 2024.

UPSC Syllabus Topic: GS Paper 3 Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

News: The article discusses the issues with India’s public finance and highlights steps that should be taken to tackle these challenges.

What are the issues with India’s public finance?

1. Interest Payments: About 40% of revenue receipts now go to interest payments.
2. Highly Leveraged: Over leverage (which demands debt servicing) and operational leverage (commitments to pay wages and pensions) limit the fiscal space for government spending.
   Note: Whenever a company or an individual business is termed as over leveraged, it means that the debt on them is more than the equity
3. Sources of Borrowing: The bulk of the borrowing of the Indian state comes from financial firms (insurance companies, pensions, and banks) which are forced to buy government bonds. This is called “a financial repression” system.

What is Primary Deficit?

The primary deficit focuses on the difference between government revenues and spending, excluding interest payments. If there is a primary surplus, the debt/GDP ratio will decline.

What should be done?

1) Voluntary Sources of Borrowing: Forcible resource mobilisation should be curtailed. This will help build a cadre of private voluntary lenders. This becomes the foundation for enhanced borrowing when faced with a crisis.

2) Maintain Primary Surplus: This would create the fiscal space to occasionally run primary deficits, in response to events like a war, a global financial crisis, or a global pandemic.

This will open access to vast resources for the country when faced with a crisis and create a healthy environment for high growth.

Question for practice:

What are the issues with India’s public finance? What steps should be taken to tackle these challenges?