India must continue to lower its fiscal deficit to bolster its policy buffers and make its debt sustainable, according to the Reserve Bank of India (RBI).
“While committing to credible fiscal consolidation, the government has led the revival in investment cycle through augmented capital expenditure, recognising its multiplier effects by crowding-in private investment and lifting the economy’s growth potential,” the RBI said in its annual report released on May 30.
“Going forward, fiscal consolidation will need to be sustained to rebuild policy buffers and ensure debt sustainability.”
Continued thrust on digitisation could aid in greater formalisation of the economy, widening the tax base, to generate the necessary resources to undertake developmental expenditure, the RBI added.
India’s general government (Centre plus states) fiscal deficit and debt is estimated to have moderated to 9.4 percent 86.5 percent of GDP, respectively, in 2022-23 from the pandemic peak levels of 13.1 percent and 89.4 percent in 2020-21, respectively.
The Centre aims to lower its budget gap to 5.9 percent of GDP in 2023-24, from 6.5 percent in the previous fiscal year. It has also reiterated its commitment to lower the fiscal deficit to below 4.5 percent of GDP by 2025-26.
Meanwhile, for 26 states and union territories, the fiscal deficit for 2023-24 is estimated to be 3.2 percent of gross state domestic product, well within the Centre’s target of 3.5 percent.
Even as it lowers the fiscal deficit from the pandemic peaks, the Centre has been taking targeted fiscal measures to contain inflation and raising its capex to boost growth and investment activity.