Model Answer
0 min readIntroduction
Fiscal slippage refers to the deviation from the budgeted fiscal targets, typically involving higher-than-anticipated fiscal deficit and lower-than-expected revenue collection. In recent years, India has witnessed several instances of fiscal slippage, particularly post the COVID-19 pandemic and exacerbated by geopolitical events like the Russia-Ukraine war. While temporary factors like the pandemic necessitated increased government spending, concerns are growing whether the recent deviations are merely cyclical or indicative of deeper, structural issues within the Indian fiscal framework. This answer will analyze the nature of recent fiscal slippage and propose a roadmap for fiscal consolidation over the next few years.
Understanding Fiscal Slippage: Cyclical vs. Structural
Determining whether fiscal slippage is structural requires differentiating between temporary and persistent factors. Cyclical slippage arises from short-term economic shocks, such as recessions or pandemics, leading to reduced tax revenues and increased social spending. Structural slippage, however, stems from inherent weaknesses in the fiscal system, including:
- Revenue Buoyancy Issues: A lack of responsiveness of tax revenues to economic growth.
- Expenditure Rigidity: Difficulty in controlling committed expenditures like salaries, pensions, and interest payments.
- Weak Tax Administration: Inefficiencies in tax collection and enforcement.
- Off-Budget Financing: Borrowing by public sector undertakings (PSUs) and other entities that are not reflected in the central government’s fiscal deficit.
Recent fiscal slippage in India exhibits characteristics of both. The COVID-19 pandemic (FY21 & FY22) undeniably caused a significant decline in revenue and a surge in expenditure, leading to a substantial increase in the fiscal deficit. However, even as the economy recovered, fiscal deficits remained elevated, suggesting underlying structural issues.
Evidence of Structural Fiscal Slippage
Several indicators point towards a structural nature of the recent fiscal slippage:
- Persistent Revenue Shortfalls: Despite robust economic growth in FY23 and FY24, tax revenue collection has often fallen short of targets, indicating limited revenue buoyancy. (Based on knowledge cutoff of late 2023/early 2024).
- Rising Interest Payments: The share of interest payments in government expenditure has been steadily increasing, crowding out resources for productive investments. In FY23, interest payments accounted for approximately 3.5% of GDP.
- Increased Reliance on Off-Budget Financing: The use of instruments like National Small Savings Fund (NSSF) and borrowing by PSUs to finance government expenditure has increased, masking the true extent of the fiscal deficit.
- Subsidies and Welfare Schemes: While essential, the expanding scope of subsidies (food, fertilizer, LPG) and welfare schemes contribute to expenditure rigidity and limit fiscal space.
Roadmap for Fiscal Consolidation (Next Few Years)
A credible roadmap for fiscal consolidation requires a multi-pronged approach:
1. Revenue Enhancement
- GST Reforms: Streamlining GST rates, improving compliance, and expanding the tax base.
- Direct Tax Reforms: Simplifying the direct tax code, reducing exemptions, and improving tax administration.
- Asset Monetization: Aggressively pursuing asset monetization initiatives, as outlined in the National Monetisation Pipeline (NMP).
2. Expenditure Rationalization
- Subsidies Rationalization: Targeting subsidies to the most vulnerable sections of society and phasing out inefficient subsidies. The DBT (Direct Benefit Transfer) scheme is a step in this direction.
- Pension Reforms: Exploring options for pension reforms to reduce the long-term fiscal burden.
- Public Sector Efficiency: Improving the efficiency of public sector undertakings through privatization, consolidation, or restructuring.
- Capital Expenditure Prioritization: Focusing on high-impact infrastructure projects with strong multiplier effects.
3. Fiscal Transparency and Accountability
- Strengthening Fiscal Rules: Adopting a robust fiscal rule framework with clear targets and escape clauses. The Fiscal Responsibility and Budget Management (FRBM) Act needs revisiting.
- Improving Budgeting Practices: Enhancing the quality of budgetary data and improving expenditure monitoring.
- Off-Budget Financing Disclosure: Bringing off-budget financing within the ambit of the fiscal deficit.
4. Medium-Term Fiscal Target
The government should aim to reduce the fiscal deficit to below 4.5% of GDP by FY26 and to below 3% by FY28, as recommended by the FRBM committee. This requires a commitment to fiscal discipline and a sustained effort to implement the above-mentioned measures.
| Fiscal Year | Fiscal Deficit Target (%) | Key Measures |
|---|---|---|
| FY25 | 5.1% | Continued focus on revenue enhancement, expenditure rationalization, and asset monetization. |
| FY26 | 4.5% | Further reforms in GST and direct taxes, pension reforms initiated. |
| FY27 | 4.0% | Significant progress in PSU reforms and subsidy rationalization. |
| FY28 | 3.0% | Achieving long-term fiscal sustainability through structural reforms. |
Conclusion
In conclusion, while cyclical factors contributed to the recent fiscal slippage, there is substantial evidence to suggest that structural weaknesses within the Indian fiscal system are also at play. A successful fiscal consolidation strategy requires a comprehensive approach encompassing revenue enhancement, expenditure rationalization, improved fiscal transparency, and a commitment to long-term fiscal sustainability. The roadmap outlined above, if implemented effectively, can help India achieve its fiscal targets and ensure a stable and prosperous economic future.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.