Fiscal Prudence and Economic Reforms

Source-This post on Fiscal Prudence and Economic Reforms has been created based on the article “Budget: Balance fiscal prudence with support for GDP expansion” published in “Live Mint” on 9 July 2024.

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

Context- The government aims to prioritize a productive workforce and enhance the competitiveness of Indian products and services in its third term. The Union Budget must strike a balance, creating fiscal room to support these goals while maintaining fiscal consolidation. The Confederation of Indian Industry (CII) has aligned its recommendations with these priorities.

What are the issues faced by the central government?

1) Setting achievable disinvestment targets is challenging because outcomes depend on unpredictable market forces.

2) The Centre’s gross tax revenue has stabilized at approximately 11.5% of GDP over the past four years. However, as per the 15th Finance Commission, India’s overall tax collections are estimated to be about 4 percentage points lower than their potential.

What are the major recommendations given by Confederation of Indian Industry (CII)?

1) Fiscal Consolidation-

A) Revive the practice of publishing medium-term deficit indicators in the Union Budget for better fiscal planning visibility.

B) Review and update the Fiscal Responsibility and Budget Management Act, as recommended by the 15th Finance Commission.

C) Establish a robust fiscal framework to enhance India’s credit rating.

2) Increasing Healthcare and Education Spending Targets -There is a pressing need to raise government spending on healthcare to 3% of GDP and on education to 6% of GDP by 2030-31.

3) Boosting Capital Spending with RBI Dividend Allocation -It suggests allocating a portion of ₹2.1 trillion dividend from the Reserve Bank of India to boost capital spending by 25% from 2023-24 levels. This will sustain growth in public capital expenditure and stimulate private investment.

4) Disinvestment & Asset Monetization-

A) Adopt a demand-based approach to select public sector enterprises (PSEs) for divestment.

B) Enhance the government’s asset monetization program by aiding ministries and state governments in identifying assets and refining regulatory execution.

C) Establish a dedicated cell in Niti Aayog or the Ministry of Finance to oversee these efforts.

D) Utilize proceeds from disinvestment and asset monetization to either reduce debt or develop new assets.

5) Taxation Reforms-

A) CII proposes a three-rate GST structure with lower rates. Simplifying tax structures and improving the ease of doing business would boost tax buoyancy.

B) They advocate including petroleum products and electricity under GST to reduce business costs by enabling input tax credit on commonly used goods and services.

Read More-7 years of GST

6) Enhancing Competitiveness Through Customs and Tax Reforms-

A) It suggests announcing a phased plan to adjust duty rates, allowing domestic manufacturers time to adapt.

B) It recommends improving compliance procedures, dispute resolution, and grievance redressal.

Question for practice

What are the major recommendations given by Confederation of Indian Industry (CII)?