Industry body CII has recommended that the government stick to a fiscal deficit target of 4.9 percent of GDP in 2024-25 and 4.5 percent in 2025-26, warning that “aggressive targets” beyond these could derail India’s economic growth.
“India has been growing rapidly amid global economic volatility. Prudent financial management for macroeconomic stability has been critical to this growth,” said Chandrajit Banerjee, Director General of CII, explaining the proposals for the upcoming Union Budget.
The CII also highlighted the announcement in the Union Budget for 2024-25 to keep the fiscal deficit at levels that help bring down the debt-to-GDP ratio.
To prepare for this, the upcoming budget could set a fast track to bring central government debt below 50 percent of GDP in the medium term (by 2030-31), and below 40 percent of GDP in the long term, the CII suggested.
Such a clear policy will have a positive impact on India’s sovereign credit rating and more so on interest rates in the economy, says the Confederation of Indian Industry (CII).
“To facilitate long-term fiscal planning, the government should consider establishing Fiscal Stability Reporting. This may include issuing annual reports on fiscal risk under various stressors and the state of fiscal stability.
This work will help predict potential economic storms or storms and assess their impact on the financial system,” he said.
Reporting may also include long-term forecasts (10-25 years) of financial positions, calculating the impact of factors such as economic growth, technological change, climate change, population changes, etc.
Several countries have adopted this progression from 10 years in Brazil to 50 in the UK. “Looking at next year’s budget, the CII has suggested sticking to a fiscal deficit target of 4.9 percent of GDP for FY25 and a target of 4.5 percent for FY26.
However, the CII has also pointed out that overly aggressive targets beyond those mentioned may hamper growth,” the industry body said. The CII suggested three interventions to move governments towards fiscal prudence.
First, states can be encouraged to establish state-level Fiscal Stability Reporting. Second, regions are allowed to borrow directly from the market, following the recommendations of the Twelfth Finance Commission.
Countries also provide guarantees in case of borrowing from government PSEs, which has an impact on the health of the government’s finances. Third, the central government can create an independent and transparent credit rating system to encourage governments to maintain fiscal prudence.
Regional ratings can be used to give them greater autonomy in deciding how to borrow and spend. Additionally, the central government can use the State Debt Ratio as one of the parameters in determining transfers to the states, including programs such as Special Assistance as Loans to States for Capital Expenditure.
“These awards will serve as a strong incentive for state governments to prioritize fiscal prudence and fiscal sustainability,” Banerjee said.
In addition to fiscal prudence at the Centre, fiscal prudence at the state level is equally important for macroeconomic stability and fiscal sustainability.
Today, the combined expenditure of the state governments is more than that of the Centre, he added.
