Indias Expenditure Path

Source-This post on Indias Expenditure Path has been created based on the article “We need tax reforms to support the country’s expenditure path” published in “Live mint” on 19 June 2024.

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

Context-The article discusses the fiscal policy challenges facing the new government in India. It highlights the importance of stabilizing the public debt-to-GDP ratio for achieving rapid economic growth with macroeconomic stability.

The pandemic led to a massive increase in public debt across major economies, including India, where the ratio shot up by over 13 percentage points in 2020-21 to 88.4%. Although it has gradually declined to 82.2% in 2023-24, it is still higher than the ideal level for India. Indias Expenditure Path

What factors contributed to the recent decrease in India’s public debt ratio?

It was driven by favorable dynamics such as higher nominal GDP growth compared to government borrowing costs and a reduction in the primary fiscal deficit. This is because economic conditions have improved post-pandemic.

What is the importance of monitoring fiscal deficit for Indian economy?

The fiscal deficit is closely monitored because it impacts various economic factors, including aggregate demand and interest rates. It plays an important role in influencing conditions for businesses, home buyers, job seekers, bond traders, and other economic agents.

What are the challenges that India face in its fiscal policy?

1) India’s Urgent Spending Priorities– India faces pressures to increase military spending amidst geopolitical tensions, invest in a green transition to mitigate climate impacts, and enhance spending on public goods and services.

2) Electoral Pressure for Increased Spending– It is important to understand that the 2024 election results could pressure the government to increase spending to please the electorate. This is because there are not enough quality jobs.

3) Fiscal Federalism– Fiscal policy, including the concept of fiscal federalism, has transformed into a competitive bargaining process involving diverse interest groups, ministries, and levels of government.

4) Minimal Tax Liabilities – More people are filing income tax returns, and more firms are covered by GST, showing that the tax base is expanding. However, many individuals still report no tax liabilities.

Read more- Five Years of GST: Achievements, Challenges and Way Ahead

What should be the way forward?

1) Tax Reforms– Tax reforms are necessary to boost the tax-to-GDP ratio, which has stayed relatively stable in India despite economic shifts. The recommendation includes keeping direct tax rates low, steady, and predictable, while simplifying the GST structure and aiming for a higher average rate.

2) Fiscal Consolidation-There is a need to create fiscal space by reducing unnecessary spending and increasing revenue

3) Capitalizing on Economic Advancement – India’s expected transition from a lower-middle-income to an upper-middle-income country by the World Bank’s definition by the end of this decade highlights an opportunity. Upper-middle-income economies generally collect more tax revenue per unit of economic output compared to lower-middle-income countries. This transition presents India with a chance to increase its tax-to-GDP ratio as incomes rise.

Question for practice

What challenges does India encounter in its fiscal policy? What steps should be taken to move forward?