India’s Fiscal Journey: From fragile Five to a Focus on Long-term Growth
Table of Contents
- 1. India’s Fiscal Journey: From fragile Five to a Focus on Long-term Growth
- 2. Navigating the Pandemic and Beyond
- 3. looking Ahead: Challenges and Opportunities
- 4. how have the initiatives like the PLI scheme contributed to India’s goal of fostering self-sufficiency in key sectors?
- 5. India’s Fiscal Journey: A Conversation with Dr. Rumki Mazumdar
Maintaining fiscal discipline is crucial for economic stability, especially in an era marked by global uncertainty and shifting trade dynamics. India, once identified as one of the “fragile five” in 2014 due to a 5% fiscal deficit and weakening economic fundamentals, has successfully illustrated the transformative power of prudent fiscal management.
The “fragile five” label painted a grim picture, with global analysts predicting economic turmoil. However, India demonstrated resilience by prioritizing fiscal consolidation. The government implemented measures outlined in the new Fiscal Responsibility and Budget Management (FRBM) regime, aiming for revised targets for key fiscal indicators.
The results were remarkable. The fiscal deficit, which stood at 4.5% of GDP in fiscal year 2013-2014, was progressively reduced to 3.4% by 2018-2019.This fiscal discipline curbed inflation, boosted domestic savings, and attracted foreign capital.A stronger currency, increased investments in infrastructure and capacity building, and improved trade balance followed, propelling India’s economic recovery and solidifying its position as a global economic powerhouse.
When the COVID-19 pandemic struck,India adopted a targeted approach,providing subsidies and financial relief to specific sectors and individuals while considerably increasing capital expenditure (capex). This strategic allocation of resources, which rose from 1.6% of GDP (a stagnant figure from 2014-2015 to 2018-2019) to 3.2% in 2023-2024, prioritized critical infrastructure projects like highways, railways, renewable energy, and ports.
Recognizing the importance of self-sufficiency and mitigating vulnerabilities linked to geopolitical tensions, the government championed domestic manufacturing initiatives like the Production Linked Incentive (PLI) scheme.This aimed to reduce reliance on imports from specific regions and bolster critical sectors.
Elevating revenue mobilization proved equally crucial in India’s fiscal journey.Tax base expansion, plugging revenue leaks, and digitalization of the tax collection process resulted in a ample increase in tax collections, rising from 10% of GDP in 2014-2015 to 11.8% (budget estimate) in 2023-2024.
looking Ahead: Challenges and Opportunities
India’s fiscal consolidation has been exemplary, shrinking the deficit from a high of 9.2% of GDP in 2020-2021 to 5.6% in 2023-2024. With a target of 4.9% for the current fiscal year,the government is demonstrating its commitment to fiscal responsibility even during an election year. Further reduction to 4.5% of GDP by the next fiscal year signals unwavering resolve to manage expenditure effectively, particularly in light of global economic volatility.
However, challenges remain.While the central government strides towards fiscal consolidation, state governments continue to face pressure due to rising expenses and a declining share of capex spending. An NSE report highlights that state deficits exceed recommended limits (3% of GSDP) and the debt-to-GDP ratio poses a concern for several states. Addressing these imbalances requires collaborative efforts between the center and states, alongside tailored fiscal reforms that address specific state-level needs.
The prevailing economic outlook is optimistic, with continued prioritization of capex, sustained revenue collection, and greater state participation in fiscal discipline expected to drive India’s economic trajectory forward.
Dr. Rumki Mazumdar is director and economist with Deloitte India.
how have the initiatives like the PLI scheme contributed to India’s goal of fostering self-sufficiency in key sectors?
India’s Fiscal Journey: A Conversation with Dr. Rumki Mazumdar
India’s economic story in recent years has been one of remarkable change. Once labelled part of the “fragile five” due to fiscal concerns, it has emerged as a global economic powerhouse. Dr. Rumki Mazumdar, Director and Economist with Deloitte India, provides exclusive insights into India’s fiscal journey, the factors behind its success, and the challenges it faces.
Archyde: dr. Mazumdar, India’s fiscal management has received global applause. what, in your view, are the key factors behind the country’s impressive turnaround from the “fragile five” tag?
Dr. mazumdar: Certainly, India’s story is one of remarkable resilience and strategic fiscal management. When labelled a part of the “fragile five,” India took decisive steps to prioritize fiscal consolidation. The implementation of the new Fiscal Obligation and Budget Management (FRBM) regime, alongside measures to curb inflation and attract foreign capital, proved instrumental in stabilizing the economy.
Archyde: The pandemic presented a significant challenge. How did India’s fiscal approach evolve during this period, and what strategies proved most effective?
Dr. Mazumdar: The COVID-19 pandemic demanded a targeted and efficient fiscal response. India adopted a balanced approach, providing targeted subsidies and financial relief to vulnerable sectors and individuals while significantly increasing capital expenditure (capex). This strategic allocation of resources proved crucial for supporting critical infrastructure projects and driving economic recovery.
Archyde: Beyond immediate crisis management, what long-term fiscal goals are shaping India’s economic future?
dr. Mazumdar: India is focused on fostering self-sufficiency and mitigating external vulnerabilities. Initiatives like the Production Linked Incentive (PLI) scheme aim to bolster domestic manufacturing in key sectors. Simultaneously, the government is prioritizing tax base expansion and revenue mobilization to ensure enduring funding for future growth and development.
Archyde: Looking ahead, what are the primary fiscal challenges that India needs to address, both at the national and state levels?
Dr. Mazumdar: While the central government has made remarkable strides in fiscal consolidation, state governments continue to face pressures related to rising expenditure and declining capex spending. Bridging this gap and ensuring coordinated fiscal discipline across all levels of government is crucial for sustained economic progress. The focus needs to be on tailoring fiscal reforms to address the specific needs of individual states.
Archyde: What message would you give to global investors considering India as a potential investment destination?
dr. Mazumdar: India’s commitment to prudent fiscal management and its focus on long-term growth create a compelling environment for foreign investment. The country’s dynamic economy, coupled with supportive policy measures, presents significant opportunities for businesses across diverse sectors.
archyde: Thank you for your insightful perspective, Dr. Mazumdar.
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