Fiscal Consolidation – UPSC GS3

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.

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.

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.