It’s the season of clear targets, quick wins and instant applause, as the Olympics of 2024 kick off in Paris, a city aflutter with flags bearing their famous ‘rings of unity.’ Among other virtues, the Olympic Games offer us a contrast with economic frames, which have complex targets, slow wins and patchy applause.
So much so that our heads can begin to spin if rings get run around what’s good for the economy, as if the data overload of every budget is not heavy enough. As it happens, this week’s budget has left us with a macro head-spinner: Can India’s government use a debt cap as the operative constraint on the fiscal space at its disposal?
In other words, can the yawning gap between its outflows and inflows of money, its fiscal deficit (or ‘fisc’), stay enlarged so long as its debt pile keeps reducing? After declaring 4.9% of GDP as this year’s fisc, with an aim of going below 4.5% in 2025-26, finance minister Nirmala Sitharaman said that from 2026-27 onwards, “Our endeavour will be to keep the fiscal deficit each year such that the central government debt will be on a declining path as a percentage of GDP.”
To be sure, the latest budget is designed to tick that box. It projects the Centre’s debt at 56.8% of GDP this year, down from last year’s 58.1%. Does this explain why the FM did not offer an extended glide path for the fisc?
For clues, look up the Centre’s stance on deviations from goals set by India’s Fiscal Responsibility and Budget Management law. In keeping with a routine of the past half decade, its latest FRBM Statement speaks of the pandemic forcing the fisc to peak (and other demands on central coffers), but what grabs attention is this: “An active and nimble fiscal policy strategy is a prerequisite for smooth fiscal policy operations. Therefore, rolling targets for next two years have not been provided.”
Later, it refers to the adoption of “a well-calibrated strategy to retain the flexibility to respond to emerging challenges.” Implicit in all this is a clean break being sought from the FRBM goal of keeping the fisc under 3% of GDP. Now, ever since the covid shock exposed the flaws of that law, there has been a valid case to amend it for counter-cyclical action.
Instead of rigidly keeping a tight rein on the fisc, policy must retain the leeway to loosen it against big shocks and slumps. Keeping debt levels in check has its virtues too. It relieves ongoing finances of an upswell in interest outgo—and future generations of an unfair burden.
Yet, unlike an Olympic event, debt cannot be the only needle under watch, given the other risks of a loose fiscal policy. As consumption has been in a slump, we escaped the inflationary impact of a budget bloat. But a boom across consumer markets could put price stability at threat.
As we have seen before (after the Great Recession), what begins as a fiscal stimulus can quickly turn into a financial overdose. If overall demand undergoes a broad revival, an upturn we’ve all been waiting for, the Centre’s fiscal dominance could see an inflation flare-up that proves hard for the central bank to tame.
The bond market would be rattled and the cost of capital would rise for private investors. While a big fisc has not crowded out the private sector so far, we can’t take this scenario for granted. Indeed, with so many inter-related variables at play, going on debt-watch alone would be too risky.
Yes, our economy has grown fast thanks to fiscal spurs, but this isn’t a game whose rules we can reset. Like it or not, we can’t afford to let the fisc fade from our fiscal policy focus.