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Fiscal policy refers to the government’s use of taxation, spending, and borrowing to influence the economy. It affects various aspects of the economy, such as growth, inflation, deficit, debt, and welfare.

Some of the main challenges in the fiscal policy of India are:

– Reducing the fiscal deficit and public debt: India has a high fiscal deficit and public debt compared to its peers. The fiscal deficit is the difference between the government’s revenue and expenditure, while the public debt is the total amount of money that the government owes to its creditors. A high fiscal deficit and public debt can limit the government’s ability to spend on public goods and services, increase the risk of default and inflation, and reduce investor confidence. According to the [Economic Survey 2022-23], India’s fiscal deficit was estimated at 6.8% of GDP in 2021-22, while its public debt was projected at 89.8% of GDP in 2020-21,
– Balancing growth and stability: India faces a trade-off between stimulating growth and maintaining stability in the economy. On one hand, the government needs to boost growth by increasing spending on infrastructure, health, education, and social welfare, especially after the impact of the COVID-19 pandemic. On the other hand, the government needs to ensure stability by keeping inflation, interest rates, and exchange rates under control, and avoiding excessive borrowing and spending. According to the [IMF], India’s GDP growth is expected to be 9% in 2021-22 and 7.8% in 2022-23, while its inflation rate is projected to be 5.6% in 2021-22 and 4.9% in 2022-23.
– Reforming the tax system: India has a complex and inefficient tax system that hampers its revenue collection and economic efficiency. The tax system suffers from low tax-to-GDP ratio, high compliance costs, multiple exemptions and deductions, narrow tax base, evasion and avoidance, and litigation and disputes. The government has taken some steps to simplify and rationalize the tax system, such as introducing the Goods and Services Tax (GST) in 2017, reducing the corporate tax rate in 2019, and launching the Vivad se Vishwas scheme in 2020 to settle pending tax disputes. However, more reforms are needed to improve the tax administration, broaden the tax base, eliminate loopholes, and enhance transparency and accountability.
– Improving the quality and efficiency of public expenditure: India has a low level of public expenditure as a share of GDP compared to its peers. Moreover, the quality and efficiency of public expenditure is also low, as it is often skewed towards non-productive items such as subsidies, interest payments, and salaries, rather than productive items such as capital formation, health, education, and social protection. The government needs to improve the quality and efficiency of public expenditure by prioritizing spending on key sectors that can boost growth and welfare, rationalizing subsidies and transfers that are not well-targeted or effective, enhancing public investment management, and strengthening monitoring and evaluation mechanisms.

The outlook for 2024 depends on how well the government addresses these challenges and implements its fiscal policy objectives. According to the [Budget 2022-23], the government has set a medium-term fiscal consolidation path that aims to reduce the fiscal deficit to 4.5% of GDP by 2025-26. The government has also announced various measures to support growth and recovery from the pandemic, such as increasing capital expenditure by 34.5%, launching a National Infrastructure Pipeline with an outlay of ₹111 lakh crore ($1.5 trillion), creating a new Development Financial Institution with a capital of ₹20,000 crore ($2.7 billion), providing ₹35,000 crore ($4.7 billion) for COVID-19 vaccination, etc.

However, there are also some risks and uncertainties that could affect the fiscal policy outlook for 2024. These include:

– The evolution of the COVID-19 pandemic and its variants: The pandemic poses a major threat to both health and economic outcomes in India. The emergence of new variants such as Omicron could lead to further waves of infections, lockdowns, disruptions, and deaths. This could adversely affect growth, revenue collection, expenditure needs, fiscal deficit, and debt levels.
– The geopolitical situation and global economic conditions: The global environment is also uncertain due to various factors such as rising tensions between major powers (such as US-China trade war), regional conflicts (such as Russia-Ukraine crisis), climate change (such as extreme weather events), commodity price fluctuations (such as oil price shocks), financial market volatility (such as capital flow reversals), etc. These factors could affect India’s trade, investment, remittances, exchange rates, inflation, and growth prospects.
– The implementation and coordination challenges: The fiscal policy in India involves multiple levels of government (central, state, and local) and various institutions (such as Parliament, Finance Commission, GST Council, RBI, etc.). This requires effective coordination and cooperation among them to ensure fiscal discipline, transparency, accountability, and efficiency. However, there could be challenges in implementing and coordinating the fiscal policy due to political, institutional, or administrative constraints.

Source:
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(2) Fiscal Policy in India: Trends and Trajectory – DEA. https://dea.gov.in/sites/default/files/FPI_trends_Trajectory.pdf.
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(10) India 2024: Policy priorities for the new government | Brookings. https://www.brookings.edu/articles/india-2024-policy-priorities-for-the-new-government/.
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(12) What challenges does the new fiscal bring for the Indian economy …. https://www.hindustantimes.com/india-news/what-challenges-does-the-new-fiscal-bring-for-the-indian-economy-101648746352876.html.