Fiscal Strategies for Economic Resilience – UPSC Daily Editorial Analysis – 02nd Feb 2024

In navigating the complexities of economic resilience, fiscal strategies emerge as crucial pillars for stability and growth. A judicious approach to public finances becomes paramount, necessitating a balance between stimulating economic activity and maintaining fiscal discipline. Governments must strategically deploy fiscal policies that not only address immediate challenges but also foster long-term resilience. This entails targeted investments in critical sectors, such as healthcare, education, and infrastructure, to enhance the overall capacity of the economy. Additionally, a focus on progressive taxation and efficient public spending is vital to ensure equitable distribution of resources and mitigate socio-economic disparities. The editorial underscores the importance of proactive fiscal measures that adapt to dynamic global conditions, positioning nations to withstand unforeseen shocks.

Tag: GS – 3 Fiscal Policy, Government Policies & Interventions, Monetary Policy, Mobilization of Resources, Inclusive Growth

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Despite uncertainties on the global front, India stands out as the fastest-growing major economy, demonstrating stability in key economic indicators such as the current account deficit, currency, and inflation.

Current Status of India’s Growth Trajectory

• Government’s Investment Strategy
  • Investment has surpassed GDP growth, reaching 34.9% this year.
  • There is a call for the government to moderate budgetary support to capital spending for achieving the targeted fiscal deficit of 4.5% of GDP by 2025-26.

• Fiscal Consolidation in Election Year
  • Achieving fiscal consolidation in an election year is crucial.
  • The Ministry of Finance expects close to 7% growth next fiscal, envisioning India becoming a $7 trillion economy by the end of the decade.

• Healthy Medium-Term Forecasts
  • Multilateral agencies forecast moderate GDP growth of 6.4% next fiscal.
  • Slower global growth and tighter financial conditions globally and domestically contribute to this moderation.

• Inflationary Concerns
  • Core inflation in India has corrected quickly to 3.8%, and fuel inflation is at -1%.
  • High food inflation, linked to the underperformance of agriculture and the rural economy, remains a concern.

• Climate Change and Economic Impacts
  • 2023 marked the highest annual temperature, emphasizing escalating climate risk.
  • The Ministry of Finance stresses the need for research, development, and measures to adapt to climate change without compromising economic growth.

• Monsoon
  • Overall rainfall was 6% below expectations during the monsoon season.
  • The SBI Monsoon Impact Index indicates improved agricultural productivity.

• Continuous Thrust on Capital Expenditure
  • Capital expenditure during the first five months of 2023 was robust.
  • New company registrations increased, reflecting strong growth intentions.

• Reclassified India’s Exchange Rate Regime
  • The IMF classifies India’s exchange rate regime as a “stabilized arrangement,” indicating a shift in perception.
  • This classification contrasts a fixed exchange rate with a floating system.

• Declining Current Account Deficit (CAD)
  • India’s CAD declined to 1% of GDP in the second quarter of 2023.
  • The CAD decrease is attributed to improved numbers according to RBI data.

Major Challenges for the Indian Economy in 2024

• Global Economic Integration
  • Rising geopolitical events pose a threat to India’s growth.
  • Geoeconomic fragmentation and a slowdown in hyper-globalization impact global trade.

• Energy Security vs Transition
  • A complex trade-off exists between energy security and the ongoing energy transition.
  • Policy actions for energy goals can have spillover effects on other economies.

• Artificial Intelligence (AI) Challenges
  • The rise of AI poses challenges, especially in the services sector.
  • The benefits of complementarity and risks of displacement are highlighted.

• Rising Inflation
  • The impact of rising inflation on the broader economy is a major challenge.
  • Inflation affects growth by changing labor supply and demand.

• Requirement of Skilled Workforce
  • Ensuring a talented and appropriately skilled workforce is a policy priority.
  • Despite an increase in employable percentages, more needs to be done.

• Geopolitical Tensions
  • Geopolitical tensions, including events in the Red Sea, impact exports.
  • Estimates suggest lower exports due to the crisis in the Red Sea.

Reforms Required for Robust Economic Growth in 2024

• Moving Towards Fiscal Consolidation
  • Government debt to GDP ratio and interest payments necessitate fiscal consolidation.
  • Robust direct tax collections and higher dividend transfers are crucial.

• Continuing Focus on Capital Expenditure (Capex)
  • Capex’s strong multiplier effect on growth demands continued focus.
  • Government capex to GDP ratio is expected to increase in 2023-24.

• Need to Spur Consumption
  • Consumption growth needs a boost, especially in the lower-income category.
  • Measures to spur consumption demand are essential for economic revival.

• Increased Spending on Human Capital
  • Investment in health, education, and skilling is crucial for the demographic dividend.
  • Higher expenditure on human capital is needed for meaningful employment.

• Focus on Agriculture and the Rural Sector
  • Improving productivity in the agriculture sector is vital for rural incomes.
  • Adoption of technology and rural infrastructure development are essential.

• Focus on Contemporary Issues
  • Enabling a business-friendly environment, addressing environmental concerns, and uplifting marginalized sections require focus.
  • Emphasis on equitable, sustainable, and green growth is crucial.

Conclusion

• The first advance GDP estimates project robust growth in the Indian economy, exceeding earlier predictions. 
• Government fiscal policies transitioning from pandemic-focused welfare to public investment have enhanced economic capacity. 
• However, challenges such as managing food inflation, adapting to climate change, and maintaining macroeconomic fundamentals need attention for sustained growth. 
• Policymakers face a challenging yet imperative task in steering the economy toward stability and prosperity.

Source: IE