Story Of The Week

Budget 2015 Focus: Fiscal Consolidation

Feb 28, 2015 is the date which has been marked in all corporate as political circles as the D-Day. The sole reason being that finance minister Mr. Arun Jaitley presents the first full budget of reform oriented Modi government. Post its victory in 2014 Lok Sabha polls, this will be the first acid test for the government. The significance of the day being reflected by the fact that even the BSE and NSE are operational on Feb. 28.It is very much expected that the focus of this year budget will be fiscal consolidation. Before we go into intricacies it will be beneficial if understand what exactly is Fiscal consolidation.

What is Fiscal Consolidation?

A conscious policy effort is by the government to live within its means and thereby bring down the fiscal deficit and public debt. It includes, among other things, efforts to raise revenues and bring down wasteful expenditure such as subsidies. As a larger mandate, it also involves the participation by state governments in the process.

In layman terms, various measures of reducing Fiscal consolidation can be:

  • Cut down subsidies.
  • Stop leakages in subsidies.
  • Reform the tax structure (implement GST).
  • Improve the performance of PSUs.
  • Recover black money
  • Stop ministers from using Business class air tickets and other wasteful Government expenditures. (= take austerity measures)
  • + Policy reforms such as FDI (to create environment conductive for economy = that will automatically increase productivity and tax collection.)

Why is it a need of the hour for Indian government?

It is very much need of the hour because it will directly help in upgrading India’s credit rating by rating agencies and will usher in foreign investments in domestic economy, thus, in a way providing stimulus to Modi government’s flagship “Make in India” campaign.

Fiscal deficits have worsened across member nations of BRIC (Brazil, Russia, India and China) and TIMS (Turkey, Indonesia, Mexico, and South Korea) in the present down cycle. Apart from this, India’s fiscal deficit, at 4-4.5% of GDP, is already the lowest it has had in 35 years (barring the up cycle years of FY04-08).

Lower rates will revive growth, improve tax buoyancy and improve the fiscal position similar to what happened in FY04-08.

Windfall gains from lower oil prices should help to fund higher allocations (42% of central taxes from 32%) to states reportedly recommended by the Y.V. Reddy Finance Commission.

The government is likely to achieve its financial year 2015 fiscal deficit target of 4.1% of gross domestic product (GDP) and aim for the pre-committed 3.6%.

Following chart gives the trend analysis of Fiscal deficit over the years.

Fiscal Deficit Trend

Fiscal Deficit Trend

It remains to be seen what policy changes will take place once the budget is presented. A reduction of 25 bps or .25% have been made this year in January and investors have high hopes that a further rate cut of 75 bps or .75% will be made once the budget is presented but RBI governor Raghuram Rajan has already warned that further cuts will be implemented if current Fiscal consolidation targets are met since the inflation rate has also to be reined in.

References:

  1. Fiscal consolidation to go on; further rate cuts expected

Link: http://www.livemint.com/Money/TIG7BkBgBHLPmgBIdyU3MN/Fiscal-consolidation-to-go-on-further-rate-cuts-expected.html

  1. I’m not sitting in judgment over the govt: Raghuram Rajan

Link:  http://www.livemint.com/Industry/nAT2lWVbvPk4dTEdmxGk5O/Im-not-sitting-in-judgment-over-the-govt-says-Rajan.html

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