India Needs To Keep Its Deficit Target Flexible

HE Fiscal Responsibility and Budget Management Act mandates that India's fiscal deficit be limited to 3 percent of GDP.

- P K SANTHOSH KUMAR

While the rule was introduced to maintain financial stability, it has unintentionally restricted growth-oriented spending. It has led to a greater focus on revenue expenditure (like salaries, subsidies and interest payments) rather than capital expenditure (like roads, railways and healthcare), which are essential for long-term development. As India aims to become a developed nation by 2047, it's time to rethink this approach.

Economic research suggests that a rigid 3 percent deficit limit does not always benefit growth. The government should have the flexibility to increase the deficit during slowdowns and scale it down when growth is strong. The current policy forces states and the central government to prioritize short-term expenses over long-term assets, which slows down overall development.

Indian states are particularly struggling due to limited fiscal space, affecting their ability to invest in public infrastructure, healthcare and education. Since most states rely on central funds, a one-size-fits-all deficit rule fails to consider the regional economic differences and financial constraints.