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Fiscal Consolidation refers to the strategic management of government finances aimed at reducing fiscal deficits, controlling public debt, and ensuring macroeconomic stability. India’s recent journey in this regard has been marked by a significant transformation, particularly in the post-2014 era.

Background:

In 2013-14, India was labelled as one of the "Fragile Five", largely due to its ballooning fiscal deficit (touching 5% of GDP in a quarter), high inflation, and weakening currency. This tag underscored the urgency of restoring fiscal health.

Post-2014 Measures:

• FRBM Act Revamp: The government recommitted to the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, revising fiscal targets and focusing on fiscal discipline.
• Deficit Reduction: Fiscal deficit was reduced from 4.5% of GDP in FY 2013-14 to 3.4% in FY 2018-19.
• Revenue Boost: Digitization and broader tax reforms helped increase tax receipts from 10% of GDP (FY 2014-15) to 11.8% (FY 2023-24).
• Capex Focus: Capital expenditure nearly doubled from 1.6% of GDP in FY 2014-15 to 3.2% in FY 2023-24, emphasizing infrastructure over consumption.

Pandemic Impact and Recovery:

• During COVID-19, India’s fiscal deficit soared to 9.2% of GDP (FY 2020-21) due to emergency spending.
• Unlike blanket stimulus in some countries, India opted for targeted support (MSMEs, displaced populations, healthcare) while continuing infrastructure investment.
• This strategy avoided long-term inflationary pressure and built long-term productive capacity.

Structural Reforms:

• Production Linked Incentive (PLI) schemes aimed at reducing import dependence and boosting domestic manufacturing.
• Enhanced export competitiveness due to fiscal prudence and macroeconomic stability.

Current Scenario:

• Fiscal deficit reduced to 5.6% of GDP in FY 2023-24, with a target of 4.9% in FY 2024-25, and further narrowing to 4.5% by FY 2025-26.
• States remain a concern: their deficits exceed the 3% of GSDP limit, averaging 3.2% in FY 2023-24, with rising debt levels and declining capex.

FRBM Act & N.K. Singh Committee:

• FRBM Act (2003) aims to cap the fiscal deficit at 3% of GDP.
• The N.K. Singh Committee (2016) recommended:
  • Shift from rigid deficit targets to debt as the primary anchor.
  • Set up an autonomous Fiscal Council.
  • Flexibility via an “escape clause” (up to 0.5% extra deficit during crises).
  • Limit borrowings from RBI to specific emergency conditions.

Significance of Fiscal Consolidation:

• Macroeconomic Stability: Controls inflation and keeps currency stable.
• Investment Magnet: Low deficits improve investor confidence.
• Reduced Debt Burden: Less borrowing means less stress on future generations.
• Efficient Governance: Ensures better resource allocation and economic resilience.