Source: The post is based on the article “Shedding more light on the debt dilemma” published in “The Hindu” on 27th July 2023.
Syllabus: GS3- Indian Economy and issues relating to planning, mobilisation of resources.
News: In this article author discusses India’s high fiscal deficit and public debt, emphasizing the challenges it poses to the economy and future generations. The article points to the need for fiscal consolidation, improved tax compliance, and suggests policy reforms such as reducing government involvement in certain sectors and better management of subsidies.
About current fiscal deficit and public debt data of India.
Fiscal Deficit 2020-21: It increased to 13.3% of GDP.
Public Debt 2020-21: Elevated to 89.6% of GDP.
Post-Pandemic Recovery: Deficit and debt ratios receded to 8.9% and 85.7%, respectively.
State-Level Debt: Punjab’s Debt to GSDP is 48.9%, West Bengal’s is 37.6%, Rajasthan’s is 35.4%, and Kerala’s is close to 33%.
Primary Deficit 2022-23: Stands high at 3.7% of GDP and is budgeted over 3% for 2023-24.
What challenges are posed by India’s elevated fiscal deficit and public debt?
Interest Payments: They consume over 5% of GDP and 25% of revenue receipts, surpassing government spending on education and healthcare combined.
Crowding Out Essential Spending: Large interest payments reduce funds available for infrastructure, human development, and environmental priorities.
State Debt Issues: Specific states, like Punjab (48.9% Debt to GSDP ratio) and West Bengal (37.6%), have high debt ratios.
Limited Counter-Cyclical Fiscal Policy: High debt restricts the government’s ability to respond to economic downturns or shocks.
Distorted Debt Market: Commercial banks and insurance companies mainly buy government bonds due to regulations, affecting lending to sectors like manufacturing.
Rating Concerns: High deficits lead to lower sovereign ratings, increasing the cost of borrowing internationally.
Future Generations: The next generation will bear the burden of today’s borrowing.
Election Cycles: Upcoming elections may push the debt ratio higher due to electoral budgeting.
What measures should be implemented to address these issues?
Follow Finance Commission Recommendations: The Union government should reduce its deficit relative to GDP from 43.6% in 2015-16 to 36.3%, and States should aim for about 22%.
Enhance Tax Collection: Goods and Services Tax (GST) has stabilized, showing high growth potential. This can improve revenue.
Tax Administration: Technology has made tax administration efficient. Cross-matching GST with income-tax returns can further improve compliance.
Increase Tax-GDP Ratio: Expected to rise by 1.5 to 2 percentage points in the medium term, boosting revenue.
Disinvestment: Speed up the process of selling government stakes in sectors where the private market can operate, like in Bharat Sanchar Nigam Limited.
Limit Subsidies: Favor direct cash transfers to people rather than subsidizing goods and services, preventing resource distortions.
Enforce Fiscal Discipline: Adhere to Fiscal Responsibility and Budget Management rules, especially when permitting states to borrow.
Reassess State Roles: Governments should avoid redundant or unnecessary expenses and avoid competitive market involvement.
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