Centre should continue to incentivize states to implement reforms and increase capital spending. The capex-led growth strategy will ensure medium-term debt sustainability.

According to the Economic Survey 2022-23, In recent years, the Indian government has pursued a comprehensive fiscal stability policy. Using the crisis as an opportunity to implement reforms, the government implemented a number of policy measures in recent years. These policies range from increasing budget transparency and using prudent assumptions in the Budget to transforming the tax ecosystem through the implementation of technology, rationalising GST, lowering tax rates, simplifying tax compliances, and eliminating the uncertainty surrounding retrospective taxation.

All of these measures have resulted in a greater formalisation of the economy, improved compliance and better reporting of income by the public, and have given the government’s commitment to fiscal management credibility.

The increase in India’s debt and deficit ratios is due not only to increased spending necessitated by the pandemic-induced halt in economic activity, but also to contraction or slower growth of nominal GDP. Due to ongoing financial system stress, India’s GDP growth slowed in FY20. While the banking sector was being repaired and recapitalized, the non-banking financial sector crisis heightened the banking system’s uncertainty. This slowed credit growth, resulting in slower GDP growth. The pandemic exacerbated the situation in FY21, causing nominal GDP to contract, which is unusual in India.

The fiscal glide path illuminates the path for fiscal policy as India’s economic recovery progresses amid ongoing global uncertainties and risks. In uncertain times, this will provide more significant fiscal space for policy action. Furthermore, fiscal discipline, in reality, translates into fiscal stimulus for all sectors of the economy via lower interest rates. As governments improve and maintain fiscal sustainability, the risk premium embedded in interest rates falls, lowering the cost of capital for all segments of society – on educational loans, housing loans, car loans, and business loans – and putting more money in their hands.

According to the Survey, the stimulus effect of fiscal deficit is likely to be greater in emerging market and developing economies (EMDE) than in advanced economies. financial markets do not treat advanced and emerging economies in terms of fiscal deficits in the same way. especially important in an era of rising interest rates.

To ensure a stronger General Government, the Centre should continue to incentivize states to implement reforms and increase capital spending. The capex-led growth strategy will ensure medium-term debt sustainability.

Galactik Views