The Budget and the imperative of fiscal consolidation, Pg6

Key Highlights:

• The Union Budget 2026-27 emphasizes expenditure programs for India to become a developed nation by 2047, focusing on advanced technology sectors.
• The share of revenue expenditure has decreased from 88% in 2014-15 to approximately 77% in 2026-27 (BE), while capital expenditure has increased.
• The Centre's capital expenditure growth has slowed, with a budgeted increase of 11.5% in 2026-27 (BE), marginally higher than the assumed nominal GDP growth of 10.0%.
• The buoyancy of Centre’s gross tax revenues in 2026-27 (BE) has fallen to 0.8, mainly due to lower GST collections.
• The Sixteenth Finance Commission (FC16) maintained the share of States in the divisible pool of central taxes at 41% and discontinued revenue deficit grants.
• The pace of fiscal consolidation has slowed, with a progressively falling reduction in the fiscal deficit to GDP ratio in post-COVID-19 years.

Detailed Insights:

• The government has been restructuring its revenue expenditures to provide fiscal space for changing priorities, with a notable decrease in central subsidies.
• While the Centre's capital expenditure has supported GDP growth, its annual growth rate has declined over time, raising concerns about maintaining momentum.
• The lower buoyancy of indirect taxes, particularly GST, necessitates a review of the indirect tax structure to enhance revenue mobilization.
• The discontinuation of revenue deficit grants by the FC16 will lead to a reduction in overall transfers to the States compared to the FC15 recommendations.
• The slowdown in fiscal consolidation and the shift towards targeting the debt-GDP ratio raise concerns about achieving the targets set in the Fiscal Responsibility and Budget Management (FRBM) Act 2018.
• Maintaining a high debt-GDP ratio results in a high interest payment to revenue receipts ratio, limiting the fiscal space for essential primary expenditures.
• The Budget presents a roadmap for achieving developed country status by 2047, but sustained growth requires both monetary and fiscal stability, necessitating a reevaluation of the fiscal consolidation path.

Key Concepts Involved:

• Fiscal Consolidation: Policies implemented to reduce government debt and deficits.
• Revenue Expenditure: Expenses incurred for the day-to-day functioning of the government.
• Capital Expenditure: Funds used to acquire or upgrade fixed assets like infrastructure.
• Tax Buoyancy: Responsiveness of tax revenue growth to changes in GDP growth.