The Future of Fiscal Consolidation in India

After the deleterious effect of COVID-19, which consumed nearly two full years of 2020–21 and 2021–22, the Indian economy appears set to revert back to normal again beginning 2022–23. As per the National Statistics Office (NSO) Second Advance Estimates of National Income released on 28 February 2022, the nominal and real magnitudes of the gross domestic product (GDP) at `236.4 lakh crore and `147.7 lakh crore in 2021–22 are both higher than their corresponding levels in 2019–20 at `200.7 lakh crore and `145.2 lakh crore. In the two intervening years of 2020–21 and 2021–22, the union government’s fiscal deficit had shot up to 9.2% and 6.9% of the GDP, respectively. Correspon­dingly, the combined fiscal deficit of the union and the states in these two years is estimated to be 13.8% and 10.3% of the GDP, respectively.¹

As a result, the combined and the union’s debt–GDP ratio shot up by significant margins. India’s policymakers are now faced with the task of nursing the economy so as to accelerate growth while restoring fiscal consolidation. In fact, attaining sustainable levels of debt and deficit, and optimising growth are interdependent. In this article, we examine the future of fiscal consolidation in India, drawing up a perspective for the general and the union governments and by implication, the aggregate of state governments. For this purpose, it is appropriate to start with the union government’s 2022–23 budget, which clearly signals a return to fiscal consolidation, while focusing on the expansion of infrastructure so as to lay the foundation of a robust long-term growth.