Question

A rule based fiscal policy by limiting government debt, fiscal deficit and revenue deficit to certain targets is good for fiscal consolidation in India. Elucidate this statement with different government initiatives for improving fiscal consolidation.

Answer 1

Approach:

1. In Intro part , define what is fiscal consolidation
2. In body part discuss both positives and negatives of fiscal consolidation.
3. Provide appropriate conclusion with NKSingh Committee recommendation.

Fiscal consolidation is a process where government’s fiscal health is improving and is indicated by reduced fiscal deficit. Improved tax revenue realization and better aligned expenditure are the components of fiscal consolidation as the fiscal deficit reaches at a manageable level.

Need for fiscal consolidation:

• Loosening of the fiscal deficit target (As per FRBM act,2003) will lead to excess expenditure, government debt, inflation and several other macroeconomic problems besides creating intergenerational inequality. Due to this fiscal consolidation is required by reducing the fiscal Deficit target.
• In the recent past, the economy faced troubles whenever the government made high expenditure by shooting over the FRBM targets.

No Need for fiscal consolidation:

• In a developing country, government has to make a lot of expenditure and an upper ceiling will reduce government involvement in public welfare.
• When some crisis like the 2007-08 appears, fiscal policy should have some flexibility to take care of the public welfare. Even , the NK Singh Committee suggested a carefully crafted escape clause allowing higher fiscal deficit to tackle financial crisis and take care of public interest.
• So there are both type of argument regarding fiscal consolidation. In this context , NK Singh Committee recommendations regarding limiting the government debt, fiscal deficit and revenue deficit should be implemented in letter and spirits.