Fiscal Consolidation – UPSC GS3

What is Fiscal Consolidation?
  • Fiscal consolidation is a process in which the government’s fiscal health improves, as evidenced by a smaller fiscal deficit.
  • As the fiscal deficit falls below a tolerable level, improved tax revenue realization and better directed expenditure are key components of fiscal consolidation.
  • Finance Commission Recommendations on Fiscal Consolidation: The Fifteenth Finance Commission had suggested a fiscal consolidation path where the Centre’s fiscal deficit was benchmarked at 5.5% of GDP for 2022-23. In their pessimistic scenario, it was kept at 6% of GDP.
Why Fiscal Consolidation is important?
  • In India, the fiscal deficit is the most important indicator of the government’s financial health.
  • The Fiscal Responsibility and Budget Management (FRBM) Act gives the targets for fiscal consolidation in India.
  • It would be appropriate in current economic conditions to consider a graduated return to fiscal consolidation while using fiscal policy to lay the base for faster growth in the years to come.
How Fiscal Consolidation can be achieved?
  • A high-powered inter-governmental group should be constituted to re-examine the sustainability parameters of debt and fiscal deficit of the central and State governments.
  • As per the FC 15, the 2022-23 fiscal deficit for the centre was benchmarked at 5.5% of GDP. In their pessimistic scenario, it was kept at 6% of GDP.
  • A reduction in the fiscal deficit of about 1% point of GDP from its expected level at 6.8% of GDP in 2021-22 may be considered.
  • A stepwise reduction of 0.5% points per year would enable a level of about 4% of GDP by 2025-26.

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