A shift in strategy

Using tax benefits to boost demand represents a changed path for the government and poses new challenges

- A K BHATTACHARYA

A major takeaway from Prime Minister Narendra Modi’s address to the nation on Sunday was a clear confirmation that the government had changed its economic policy focusto revive and sustain growth.

Of course, the primary reason for his address was to convey to the nation the likely impact of the decision of the Goods and Services Tax (GST) Council to bring down the number of main rates from four to two and therebyslash rates for over 450 goodsandservices. The so-called “Festival of Savings” that he believed the GST rate cut would usher in was the stated objective. But beneath that objective, a clear shift in the focus of his government's economic policy was visible.

The post-Covid years saw the Modi government followatwo-pronged approach to reviving economic growth. At one level, the Union government embarked on a steady reduction in its fiscal deficit — from over 9.2 per cent of gross domestic product (GDP) reached in2020-21t04.77 percent by 2024-25. At another level, the government soughtto achieve that fiscal consolidation through a better expenditure mix—asqueeze on revenue expenditure even as its capital expenditure rose steadily during this period.

The Union government's revenue expenditure was sharply brought down from 15.5 per cent of GDP in2020-21o 10.9 percent in 2024-25, evenasitscapital expenditure rose from 2.15 per cent to 3.18 per cent of GDPinthe same period. Of course, revenue buoyancy was a big help, which contributed to the sharpest reduction in the Union government's revenue deficit in recent decades — from 7.3 per cent of GDP in 2020-21 to 1.71 per cent in 2024-25. Thus, the government’s policy in the post-Covid years was to keep the fiscal deficit under check, rein in its revenue expenditure, and spend more on building infrastructure at a time when the private sector was not willing to invest.