|Topic: GS3 – Indian Economy – Issues relating to Planning
This topic is relevant for Mains in the context of detailed analysis and discussions related to economic theory, fiscal policies, government expenditure, deficit management, and other complex economic concepts.
- The economic theory suggests that governments should adjust their spending based on the confidence levels of private firms and households.
- During periods of low confidence where private entities hold back spending, governments are encouraged to increase spending.
- Conversely, once confidence is restored, the government should reduce expenditure.
- This counter-cyclical fiscal strategy aims to smoothen economic growth and make it more sustainable.
- Contrary to expectations, the government has demonstrated a commitment to macroeconomic stability over political considerations.
- The fiscal deficit target for FY2024-25 is set at 5.1% of GDP, lower than economist projections.
- The Finance Minister reaffirms a goal to bring the deficit below 4.5% of GDP by FY2025-26.
- If achieved, this would signify a significant unwinding of the fiscal expansion prompted by the pandemic.
- The fiscal scars of the pandemic, reflected in higher interest expenses due to a nearly 10% jump in the debt-to-GDP ratio, highlight the necessity of fiscal discipline for several years.
- Bringing the debt-to-GDP ratio back to pre-COVID levels is crucial for maintaining the government’s ability to support growth during unexpected shocks.
- The text emphasizes the importance of improving the quality of spending to address an elevated debt-to-GDP ratio.
- While spending on infrastructure contributes to GDP both during construction and in subsequent years, consumption-focused spending typically has a one-time impact.
- The government appears to be cautiously calibrating its tightening measures as confidence in economic recovery grows.
- The focus on medium-term drivers of growth is evident in the government’s allocation of resources.
- Capital expenditure, particularly for interest-free loans to private firms for research, is expected to grow faster than overall spending.
- This aligns with a broader strategy to enhance the economy’s growth potential in the medium term.
- Credible assumptions underlie fiscal consolidation efforts, with nominal GDP growth at 10.5% and an increase in tax-to-GDP ratios consistent with prior trends.
- The government’s move towards transparency by reducing extra-budgetary spending is noted.
- The primary deficit in FY25 could already be close to pre-COVID levels, indicating progress in fiscal management.
- Despite an unchanged fiscal deficit in absolute terms in a growing economy, concerns arise about deficit financing.
- The reliance on market borrowings and inflows to small-savings schemes is highlighted.
- Higher government cash balances, potentially reaching levels significantly above normal, could lead to unintended consequences, intensifying liquidity stresses in the banking system.
- By adhering to the promised fiscal consolidation path, the government exhibits a welcome trend towards medium-term fiscal management.
- This not only provides predictability to the private sector and financial markets but also attracts global bond investors seeking exposure to India.
- The potential response of rating agencies to these actions remains an area of interest.
|Economic Planning in India
|PYQ: How are the principles followed by the NITI Aayog different from those followed by the erstwhile Planning Commission in India? (250 words/15m) (UPSC CSE (M) GS-3 2018)
|Practice Question: Analyze the role of counter-cyclical fiscal strategies in promoting economic stability, citing examples from recent government policies. (150 words/10 m)