Fiscal Consolidation

What is fiscal consolidation

A conscious policy effort is needed by the government to live within its means and thereby bring down the fiscal deficit and public debt. It includes, among other things, efforts to raise revenues and bring down wasteful expenditure such as subsidies . As a larger mandate, it also involves the participation by state governments in the process. But the whole initiative is planned as a long-term exercise by the government through a road map for fiscal reform rather than through a single Budget announcement. This is particularly true for a country like India where the government's expenditure is way beyond its revenues, forcing it to borrow.

Why do rating agencies often express their concern about it?

Just as a borrower's creditworthiness depends on her indebtedness, a country's rating is often linked to its fiscal deficit. Fiscal consolidation efforts are looked at positively by sovereign-rating agencies. This is because it gives them an indication of a country's financial strength and hence, its ability and capacity to service the debt it raises. Many a time, even though an economy has grown well or its other indicators, such as external sector strength, are buoyant, it does not get a good rating only on the ground of poor efforts at fiscal consolidation.

How is India placed on fiscal consolidation ranking?

For many years, India ranked low on fiscal consolidation. However, from 2003 onwards , the government made conscious efforts to bring down its fiscal deficit and public debt after it passed the Fiscal Responsibility and Budget Management (FRBM) Act. This enabled the government to pursue fiscal reforms aimed at committing to a pre-decided level of deficit.

Though its efforts went off well in the initial years, government finances slipped in the last two years as it was forced to provide fiscal sops initially to tackle high inflation and then to contain the impact of the global financial crisis of 2008-09 that hit the real economy hard. As a result, through its fiscal stimulus package, it had to announce several fiscal concessions and also increase expenditure on account of some sops. This ended in a further worsening of the country's finances.

What is India going to do about it?

Although the government does not borrow overseas, it cannot ignore the fisc as it is now a part of the global economy. The cost of borrowing for private corporates which raise money overseas, depends a lot on its home country's sovereign ratings . It is expected that finance minister Pranab Mukherjee will roll out a road map for fiscal consolidation during the Union Budget, which includes unwinding of the fiscal stimulus.