Fiscal Management and the Upcoming Union Budget

Source-This post on Fiscal Management and the Upcoming Union Budget has been created based on the article “RBI’s surplus: To spend or not to spend” published in “The Indian Express” on 4 July 2024.

UPSC Syllabus-GS Paper-3– Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment

Context- The article discusses how the Indian government faces tough fiscal choices after receiving a surprise dividend from the RBI. It stresses the need to follow sound fiscal policy carefully, consider spending on infrastructure, and accurately understand the real condition of the economy for making wise budget decisions.

What are the principles of fiscal management?

1) Prudent Fiscal Deficit Levels -Deficits should be kept at prudent levels. In India, that level should ideally be around three per cent of GDP for the Centre according to the long-standing Fiscal Responsibility and Budget Management (FRBM) Act.

2) Balanced Approach-Governments should spend slightly more during economic downturns to boost demand. In periods of economic recovery, they should spend slightly less to avoid inflation from excessive demand. This balanced approach ensures government debt remains stable and prevents financial crises.

What are the fiscal problems in India?

1) Consistent High Fiscal Deficit-Governments in India have consistently found it difficult to control spending, whether the economy is growing slowly or rapidly. From 2000-01 to 2019-20, the average fiscal deficit of the Centre was 4.6 percent of GDP, well above the FRBM Act’s target of three percent.

Read More- Fiscal Consolidation of state governments in India

2) Debt Burden -Currently, the combined deficit of central and state governments is about 8.5-9 percent of GDP, exceeding the FRBM Act’s recommended limit of six percent. Total government debt has also risen, now surpassing 80 percent of GDP, up from an average of 74 percent in the years from 2010-11 to 2019-20.

Against this backdrop, the RBI recently announced it will transfer Rs 2.11 lakh crore to the central government as dividend, twice the anticipated amount.

What should the government do with this amount?

1) Boost Capital Expenditure–

A) Critics warn that not all capital spending is necessary for sustainable growth. They advise against ambitious infrastructure projects, pointing to China’s debt problems caused by excessive development.

B) They advocate for a careful assessment of infrastructure needs in India to avoid over-investment in non-essential projects. For ex- Spending Rs 1.6 lakh crore to revive telecom MTNL and BSNL isn’t essential, especially since private operators already offer affordable cellphone services nationwide.

2) Fiscal Prudence– Some suggest prioritizing fiscal prudence by using the surplus dividend to reduce the fiscal deficit closer to the FRBM Act’s target of three percent of GDP. This approach aims to strengthen fiscal metrics and stabilize economic growth cycles.

Thus, there is no certainty on how this surplus transfer should be used.

Question for practice

What are the principles guiding fiscal management? What are the fiscal challenges faced by India?