New Delhi, December 8
The Confederation of Indian Industry (CII) has suggested the Centre to stick with the the fiscal deficit target of 4.9 per cent of GDP for FY 25 and a target of 4.5 per cent for FY26 in the upcoming Union Budget.
Chandrajit Banerjee, Director General, CII, elaborating on the suggestions for the forthcoming Union Budget also pointed out that overly aggressive targets beyond the ones mentioned could adversely affect growth.
"India has been growing rapidly amidst a slowing global economy. Prudent fiscal management for macroeconomic stability has been pivotal to this growth," said Banerjee.
"The fiscal management has maintained the perfect balance between the fiscal deficit and fiscal support to growth. This has provided macroeconomic stability to the economy and helped build resilience in an environment of great global economic uncertainty', added Banerjee.
CII has also welcomed the announcement in the Union Budget 2024-25 to keep the fiscal deficit at levels that help reduce the debt to GDP ratio.
In preparation for this, the forthcoming budget could lay out a glide path to bring the Central Government's debt to below 50 per cent of GDP in the medium term (by 2030-31), and below 40 per cent of GDP in the long term, CII has suggested. Such an explicit target would have a positive impact on India's sovereign credit rating, and further on the interest rates in the economy in general.
"To aid longer term fiscal planning, the Government should consider instituting Fiscal Stability Reporting, he added. This could include issuing annual reports on fiscal risks under different stress scenarios and the outlook for fiscal stability," he added.
The exercise will help forecast potential economic headwinds or tailwinds and assess their impact on the fiscal path, he stated.
The reporting can also include long-term (10-25 years) forecasting of fiscal positions accounting for impact of factors like economic growth, technological change, climate change, demographic changes, etc. Several countries have adopted this proactive ranging from 10 years in Brazil to 50 years in the UK, he added.
"In addition to the fiscal prudence at the Centre, fiscal prudence at the State level is equally crucial for the overall macroeconomic stability and fiscal sustainability. Today the combined spending by State governments is higher than that of Union Government", opined Banerjee.
CII has suggested three interventions to nudge the states towards fiscal prudence. One, the States could be encouraged to institute State level Fiscal Stability Reporting.
Two, States have been allowed to borrow directly from the market, following the recommendations of the 12th Finance Commission. States also provide guarantees in case of borrowing by State PSEs, which have implications for State's fiscal health.
Three, the Union Government could create an independent and a transparent credit rating system for the states to incentivize them to maintain fiscal prudence. Rating of states could be used to grant them greater autonomy in deciding how to borrow and spend.
Additionally, the Central Government can use Credit Rating of states as one of the parameters in deciding transfers to states, including for schemes such as 'Special Assistance as Loan to States for Capital Expenditure. "Such rewards will act as a strong incentive for State Governments to prioritize fiscal prudence and fiscal sustainability of state finances", said Banerjee.