Fiscal Policy Direction and Modifications
The Union government's fiscal policy is influenced by the nature of fiscal policy rules, aiming to meet a given borrowing target.
- The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, has been the guiding framework, but recent modifications have been made.
- The primary policy target has shifted from the fiscal deficit-GDP ratio to the debt-GDP ratio.
- The new targeted debt-GDP ratio is approximately 50%, aimed to be achieved by 2031.
- This allows for a higher debt-GDP ratio than the FRBM Act's suggested 40%.
Implications for the Budget
- The government aims to reduce the debt-ratio by decreasing primary and fiscal deficits from 0.8% and 4.4% in FY 2026 to 0.7% and 4.3% in FY 2027.
- There's greater fiscal space now, with less severe deficit reductions compared to past years.
- Lower non-debt receipts necessitate reduced government expenditures to maintain deficit targets.
- Non-debt receipts in GDP are expected to fall to 9.3% in FY27 from 9.5% in FY26, mainly due to a decline in indirect taxes and GST.
Expenditure Adjustments
- The expenditure-GDP ratio is expected to decrease to 13.6% in FY27 from 13.9% in FY26.
- Capital expenditure remains stable at 3.1%, while revenue expenditure sees a reduction.
- The government focuses on capital expenditure due to its high multiplier effect.
- Development expenditures, including social sector and economic services, are reduced from 6.1% in FY26 to 5.7% in FY27.
- Rural development and agriculture expenditures fall to 1.2% in FY27 from 1.5% in FY26, affecting rural employment revenue significantly.
Concerns and Challenges
- The fiscal strategy does not adequately stimulate corporate investments amidst low global demand and exports.
- The burden of fiscal consolidation falls heavily on development and agricultural expenditures, raising concerns about distribution in growth.
- Corporate tax-GDP ratio remains similar to pre-COVID levels, indicating a lack of adjustment in this area while meeting debt targets.
