Fiscal consolidation is a process where government’s fiscal health is getting improved 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.
According to Financial time’s lexicon, “Fiscal consolidation is a reduction in the underlying fiscal deficit. It is not aimed at eliminating fiscal debt.”
In India, fiscal deficit is the king indicator to show the fiscal health of the government. Effectively, fiscal deficit indicate the amount of government borrowing for that particular year.
Excess fiscal deficit produces some adverse effects. For the government it causes interest payment burden and for the economy it produces inflationary effect, and rising interest rate in the economy.
Fiscal consolidation in India
In India, fiscal consolidation or the fiscal roadmap for the centre is expressed in terms of the budgetary targets (fiscal deficit and revenue deficit) to be realized in successive budgets. The Fiscal Responsibility and Budget Management (FRBM) Act gives the targets for fiscal consolidation in India. According to FRBM, the government should eliminate revenue deficit and reduce fiscal deficit to 3% (medium term) of the GDP. Amendment to the FRBM in 2015 makes a rolling target and envisaged to realize the 3% FD target by 2018. But the 2017-18 budget has extended the time line for the achievement of the target by one more year ie., to 2018-19.
Following measures from the expenditure side and revenue side are envisaged by the government to achieve fiscal consolidation.
- Improved tax revenue realization: For this, increasing efficiency of tax administration by reducing tax avoidance, eliminating tax evasion, enhancing tax compliance etc. are to be made.
- Enhancing tax GDP ratio by widening the tax base and minimizing tax concessions and exemptions also improves tax revenues.
- Better targeting of government subsidies and extending Direct Benefit Transfer scheme for more subsidies.
Higher economic growth rate will help government to get higher tax revenues as well. Augmentation of tax revenue is necessary to bring fiscal consolidation as there are limitations for reducing government expenditure in India.