Does India's Fiscal Profile Need a Facelift?

The role of fiscal policy becomes more crucial in the current cyclical slowdown

- Madhavi Arora

Policymaking is all about trade-offs. The upcoming budget faces an acute policy trade-off between nurturing the fading growth and diminishing fiscal space with challenging debt dynamics. At the same time, renewed uncertainties around global markets and ensuing tighter financial conditions would also weigh on the fiscal reaction function. The role of fiscal policy becomes more crucial in the current cyclical slowdown, as part of the growth hit has been attributed to tighter fiscal and monetary stance in general, while private economic agents (consumption and investment) have also stayed less robust or missing.

The policy aim thus is to ensure keeping the overall expenditure-to-GDP ratio healthy, with high revenue expenditure (revex) and healthy capital expenditure (capex) spending. Even as additional support to some segments of the economy is warranted, a delicate balance needs to be maintained, ensuring the fiscal impulse is maximized to boost potential growth. However, all of this would still have to be achieved while adhering to the medium-term fiscal sustainability.