Industry body CII has advised the government to adhere to the fiscal deficit target of 4.9% of GDP for 2024-25 and 4.5% for 2025-26, warning that "overly ambitious targets" beyond these figures could negatively impact India's economic growth.
"India has been growing rapidly amidst a slowing global economy. Prudent fiscal management for macroeconomic stability has been crucial to this growth," said Chandrajit Banerjee, Director General of CII, elaborating on the suggestions for the upcoming Union Budget.
CII also emphasised the announcement in the Union Budget 2024-25 to maintain the fiscal deficit at levels that help reduce the debt-to-GDP ratio.
In preparation for this, the forthcoming budget could outline a glide path to reduce the central government’s debt to below 50% of GDP in the medium term (by 2030-31), and below 40% of GDP in the long term, as suggested by CII.
Such a specific target would have a positive impact on India’s sovereign credit rating and, consequently, on the interest rates within the economy, the Confederation of Indian Industry (CII) stated.
"To assist longer-term fiscal planning, the government should consider introducing Fiscal Stability Reporting. This could involve issuing annual reports on fiscal risks under various stress scenarios and the outlook for fiscal stability. This exercise will help forecast potential economic challenges or advantages and assess their impact on the fiscal trajectory," it added.
The reporting could also include long-term (10-25 years) forecasting of fiscal positions, accounting for factors such as economic growth, technological change, climate change, and demographic shifts. Several countries have adopted this proactive approach, ranging from 10 years in Brazil to 50 years in the UK.
"Looking ahead to next year’s budget, CII has suggested maintaining the fiscal deficit target of 4.9% of GDP for FY25 and a target of 4.5% for FY26. However, CII has also noted that overly aggressive targets beyond these could harm growth," the industry body said.
CII has proposed three interventions to encourage states to adopt fiscal prudence.
Firstly, states could be encouraged to implement state-level Fiscal Stability Reporting. Secondly, states have been allowed to borrow directly from the market, following the recommendations of the 12th Finance Commission. States also provide guarantees for borrowing by state PSEs, which affects the fiscal health of the state.
Thirdly, the central government could create an independent and transparent credit rating system for states to incentivise them to maintain fiscal responsibility.
The rating of states could be used to grant them greater autonomy in deciding how to borrow and spend. Furthermore, the central government could use the credit rating of states as one of the criteria for deciding transfers to states, including for schemes like Special Assistance as Loan to States for Capital Expenditure.
"Such rewards will serve as a strong incentive for state governments to prioritise fiscal prudence and the fiscal sustainability of state finances," said Banerjee.
In addition to fiscal prudence at the Centre, fiscal responsibility at the state level is equally vital for overall macroeconomic stability and fiscal sustainability. Currently, the combined spending of state governments exceeds that of the Centre, he added.
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