UPHOLDING LONG-TERM FINANCIAL RESPONSIBILITY IN GOVERNMENTAL BUDGETING

Source: The Indian Express Relevance: GS III (Fiscal Policy, Government Policies and Intervention, Mobilisation of resources) Context: Economic theory suggests that governments should increase their spending when individuals and businesses are reluctant to do so. Once these entities begin spending more freely, the government should then decrease its expenditure. This counter-cyclical fiscal strategy helps to ensure more consistent and stable growth.

Introduction to Fiscal Policy Cyclicality:

The concept of "fiscal policy cyclicality" refers to the way government taxation and expenditure policies change in response to the economy's current phase.
These adjustments are based on policy decisions that react to variations in economic growth rates.
Fiscal policies can be either pro-cyclical, aligning with the economic cycle, or counter-cyclical, acting against the economic cycle's current phase.

Counter-Cyclical Fiscal Policy :

Counter-cyclical fiscal policy consists of government actions that oppose the prevailing economic trend. In times of economic slowdown or recession, the government implements measures such as increasing public spending and cutting taxes to stimulate demand and ignite economic recovery.

This approach aims to smooth out economic fluctuations by bolstering economic activity during downturns.

During a Recession:

The government engages in expansionary fiscal measures, increasing spending and reducing taxes to stimulate spending potential within the economy and mitigate the recession's effects.

During Economic Growth:

The government implements contractionary fiscal policies, which include increasing taxes and reducing public spending. This approach aims to moderate the growth by decreasing the economy's consumption capacity.

Procyclical Fiscal Policy: This approach amplifies existing economic conditions, in contrast to the stabilizing efforts of countercyclical policies.

In a Recession: Procyclical policy increases taxes and reduces government spending, further diminishing overall demand. This can deepen a recession, leading to higher unemployment and slower growth. It's akin to tightening the belt during hard times, making recovery harder for individuals and businesses.
In a Boom: The policy entails lowering taxes and increasing public expenditure, intensifying the economic upswing. This can fuel inflation, create asset bubbles, and cause the economy to overheat. While increased spending in good times may be enjoyable, it risks building vulnerabilities that can worsen the eventual downturn.

Key Concepts and Subjects:

Gross Domestic Product:

This term refers to the aggregate monetary value of all final goods and services produced within a country's borders over a given time frame, typically within a fiscal year.

Make in India Initiative:

In September 2014, the Indian Government introduced the "Make in India" initiative, a pioneering campaign aimed at revitalizing the manufacturing sector. This initiative focuses on easing regulatory frameworks, enhancing infrastructure, fostering skill development, leveraging technology, improving access to finance, and establishing efficient exit mechanisms, among other critical aspects.

The campaign proposes a comprehensive array of reforms, including simplified regulations and norms to attract foreign enterprises to establish their operations in India, aiming to transform the nation into a manufacturing hub.
Since its inception, the 'Make in India' initiative has recorded notable successes and currently targets 27 key sectors as part of its second phase, Make in India 2.0. The Department for Promotion of Industry and Internal Trade oversees the implementation of strategies for 15 manufacturing sectors, while the Department of Commerce manages initiatives related to 12 service sectors.

Fiscal Deficit:

It is the difference between the government’s total expenditure (Revenue and Capital) and its total receipts (Revenue and Capital) except the borrowings.

Fiscal Deficit

= Total Expenditure - Total Receipts except borrowing

= (Rev Exp. + Cap Exp.) - (Rev Rec. + Cap Rec. except borrowing)

= (Rev Exp. - Rev Rec.) + (Cap Exp. - Cap Rec. except borrowing)

= Revenue Deficit + Cap Exp. - Cap Rec. except borrowing

= Total borrowing

= Net borrowing at home + borrowing from RBI + Borrowing from abroad

Highlights of Budget 2022-23:

Growth Rate: Among all major economies, India’s economic growth in the current year (2021–2022) is predicted to be the highest at 9.2% of GDP.
Compared to the 6.8% predicted in the budget estimates, the revised fiscal deficit for the current year is forecast to be 6.9% of GDP (gross domestic product).
Estimates for the fiscal deficit in 2022–2023 place it at 6.4% of GDP, in line with the general fiscal consolidation plan unveiled last year, which calls for a fiscal deficit of less than 4.5% by 2025–2026.
Amrit Kaal: As part of the 25-year countdown to India@100, India has begun Amrit Kaal.

Blueprint of Amrit Kaal: Four Priorities:

1. Inclusive Development

2. Productivity Enhancement &; Investment, Sunrise Opportunities, Energy Transition, and Climate Action

3. PM GatiShakti

4. Financing of Investments

Productivity Linked Incentive: 14 sectors will see the creation of 60 lakh new employment under this programme.

PM Gati Shakti Master Plan:

PM Gati Shakti represents a groundbreaking National Master Plan focused on infrastructural development and enhancing multi-modal connectivity (linking different transportation methods such as roads, railways, airways, and maritime routes). This initiative marks a significant transformation in our strategic planning for development.
Gati Shakti is a technological platform designed to unify various departments, including Railways and Roadways, to ensure synchronized planning, implementation, and completion of projects related to infrastructure connectivity. This initiative is poised to revolutionize the way ministries and departments collaborate on infrastructure planning.
By integrating the infrastructure projects of various Ministries and State Governments, including programs like Bharatmala, Sagarmala, inland waterways, dry/land ports, and UDAN, Gati-Shakti aims to enhance connectivity. It will also encompass Economic Zones such as textile and pharmaceutical clusters, defence corridors, electronic parks, industrial corridors, fishing clusters, and agricultural zones, thereby boosting connectivity and enhancing the competitiveness of Indian businesses.

Special Economic Zones (SEZ):

An SEZ is a designated area within a country that is considered to be outside its customs territory for the purposes of trade, duties, and tariffs. These zones operate under unique regulations designed to attract foreign direct investment and boost export activities.

Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India (FAME India) Scheme:

The National Electric Mobility Mission Plan includes FAME India. FAME’s primary goal is to promote electric automobiles by offering financial aid.

There are two stages to the plan:

Phase I: began in 2015 and ended on March 31, 2019.

The program comprises plug-in hybrid vehicles, battery-electric vehicles, mild hybrid vehicles, strong hybrid vehicles, and hybrid vehicles.

Phase II: Five years starting on April 1, 2019.

Goal: Promoting the usage of 5 lakh e-3-wheelers, 10 lakh e-2-wheelers, 55,000 e-4-wheeler passenger cars, and 7,090 eBuses.
Emphasis: Electrifying shared and public transportation.

Government's Counter-Cyclical Fiscal Strategy for 2024:

Fiscal Stability Objectives: Prioritizing macroeconomic stability over short-term political gains, the government aims for a fiscal deficit of 5.1% for FY 2024–2025, with plans to reduce it further by FY 2025–2026. The forecasted fiscal deficit for FY24 is slightly below the planned 5.9% of GDP, at 5.8%.
Managing Interest Costs: The pandemic-induced rise in the debt-to-GDP ratio means facing higher interest payments from past deficits, requiring fiscal prudence for several years ahead. Gross market borrowing is projected at Rs 14.1 trillion for FY25, down from an anticipated Rs 15.4 trillion for FY24.
Boosting Capital Expenditure: An 11% increase in capital expenditure against a 6% cut in total spending indicates a focus on long-term growth initiatives, such as interest-free loans for innovation.
Improving Spending Efficiency: To combat the high debt-to-GDP ratio which limits growth potential, the government aims to enhance spending quality and gradually reduce debt without hindering GDP growth.
Implementing Fiscal Tightening: The government is gradually increasing fiscal restraint from 0.5% in FY23 to 0.7% in FY25, balancing economic recovery confidence with the need to manage debt.
Rationalizing Subsidies: Subsidy spending is being streamlined to ensure efficient allocation, particularly for fuel and food, reducing the overall subsidy budget from Rs 4.4 trillion in FY24 to Rs 4.1 trillion in FY25. This adjustment lowers the subsidy-to-GDP ratio from 1.5 in FY24 to 1.3 in FY25, a significant decrease from 3.8 in FY21.
Stimulating Rural Demand: The allocation for the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) is set at Rs 86,000 crore, matching the revised estimate for FY24 and exceeding the FY24 projection of Rs 60,000 crore.

The government's adherence to a counter-cyclical fiscal strategy, focus on macroeconomic health, and commitment to reducing the fiscal deficit for FY 2024–25 underscore a move towards responsible medium-term fiscal management. The budget's credibility is supported by realistic tax-to-GDP ratio improvements and GDP growth forecasts. It's crucial to monitor the implications of government financing decisions, especially concerning cash balance management, to ensure they don't adversely affect liquidity or monetary policy effectiveness.