India’s deteriorating fiscal condition (Live Mint Summary- 26th Feb 2018)

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India’s deteriorating fiscal condition

http://www.livemint.com/Opinion/FSWfPRxQwQGFD36uaHnxGP/Indias-deteriorating-fiscal-condition.html

Context:

  • Political parties should take note and come together with meaningful reforms to counter the worsening trend, else instead of political representatives, economic policy may end up being driven by the International Monetary Fund (IMF).

Issues:

  • Despite the increased tax revenue from higher petroleum and services tax rates, and large savings from petroleum subsidies from 2013-14 to 2017-18—about 2% of gross domestic product (GDP)—the fiscal deficit of the general government (Union and states combined) remains broadly where it was at best, with a near certainty of worsening sharply in 2018-19.
  • This compounded further by loan waivers to farmers by several state governments, possibly totaling 1% of GDP.
  • Decline in GDP when compared to 2017-18.

Solution:

  • Expenditure on “social services”, which include education, public health, water supply and sanitation, has been reduced progressively.
  • At the same time, the government wants to provide a higher subsidy to the farmers as well that might prove to be too costly.
  • The combined fiscal deficits of the centre and states in 2018-19 could easily increase by 0.5% to 1% of GDP over their target to 7% or more of GDP on account of ambitious indirect tax and disinvestment targets coupled with higher expenditures on account of increased salaries to state government employees as recommended by the last pay commission.

Way forward:

  • It is time for India to undertake meaningful structural reform policies that include a move toward market prices (food, pharmaceuticals, electricity, railways), reform of the legal and tax systems (simpler tax regimes with less discretion to tax officers and no retrospective taxes), and training to build technical skills to avoid mishaps such as the one at the Punjab National Bank recently, etc.
  • This is necessary for India to grow faster and consequently yield more revenue to the government to keep the fiscal deficit in check.
  • The fiscal vulnerabilities and, consequently, risk have increased sharply and a trigger could easily undermine confidence in the Indian economy leading to capital outflows further exacerbating the vulnerabilities.
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