India’s rapid economic growth in a challenging global environment results from prudent fiscal management, said Chandrajit Banerjee, director-general of the Confederation of Indian Industry (CII).

The industry body has offered recommendations for the Union budget: “Fiscal management has struck the right balance between deficit control and growth support, ensuring macroeconomic stability and resilience amid global economic uncertainty,” Banerjee said.

The industry body has suggested sticking to the fiscal deficit target of 4.9 per cent of GDP for the next fiscal and 4.5 per cent for 2025-26.

However, growth will take a hit if the government gets overly aggressive in its targets.

The CII has also welcomed the government’s proposal in the 2024-25 budget to keep the fiscal deficit at levels that will reduce the debt-to-GDP ratio.

It has suggested to the government to lay out a glide path to bring the government’s debt to below 50 per cent of GDP in the medium term (by 2030-31) and below 40 per cent of GDP in the long term. The budget for this fiscal has estimated debt at 56.8 per cent of GDP.

By explicitly setting out the targets, the government will have a positive impact on India’s sovereign credit rating and the interest rates in the economy.

The government should consider instituting Fiscal Stability Reporting to aid long-term fiscal planning.
This could include issuing annual reports on fiscal risks under different stress scenarios and the outlook for fiscal stability.

This will help to forecast economic headwinds or tailwinds and assess their impact on the fiscal path.

The reporting can also include long-term (10-25 years) forecasting of fiscal positions, accounting for impact of factors such as economic growth, technological change, climate change and demographic changes.

Several countries have adopted this proactive method ranging from 10 years in Brazil to 50 years in the UK.

“In addition to the fiscal prudence at the Centre, fiscal prudence at the State level is equally crucial for the overall macroeconomic stability and fiscal sustainability. Today the combined spending by state governments is higher than that of Union government,” Banerjee said.

The CII has suggested three interventions to nudge the states towards fiscal prudence.

Firstly, the states could encourage Fiscal Stability Reporting.

Second, they can borrow directly from the market, following the recommendations made by the 12th Finance Commission.

The states should also provide guarantees in case of borrowing by state PSEs.

Three, the Union government could create an independent and a transparent credit rating system for the states to incentivise them to maintain fiscal prudence.

This rating could be used to grant them greater autonomy in deciding how to borrow and spend.

Additionally, the central government can use the credit rating of states as one of the parameters in deciding transfers to states.