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Reduce deficit, expenditure to absorb future shocks: Economic Survey

Says there is a need for accelerated fiscal consolidation in view of reduced macroeconomic pressures

Press Trust of India  |  New Delhi 

Arun Jaitley
Economic Survey 2014-15.

To ensure macro stability and provide cushion against future downturns, the pre-Economic Survey proposes creating additional fiscal space by reducing deficits and controlling expenditure.

"India must meet its medium-term fiscal deficit target of 3% of GDP. This will provide the fiscal space to insure against future shocks," the Economic Survey for 2014-15, which was tabled in Parliament today, said..

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"The space is necessary to insure against future shocks. The recommended strategy would also take India closer in fiscal performance, to that of its emerging market peers," the document tabled by Finance Minister Arun Jaitley, said.

The fiscal action cannot wait. It should continue in the upcoming year as well, it said.

There is a need for accelerated fiscal consolidation in view of reduced macroeconomic pressures.

The survey has outlined the two pillars of this medium-term strategy reduction of deficits and expenditure control and switching.

It has suggested reduction of fiscal deficit over the medium term to the established target of 3% of GDP and moving towards the golden rule of eliminating the revenue deficit.

The survey has recommended that borrowing should be only for capital formation and not to fund current expenditures.

There is a need to maintain a firm control on expenditures, in order to achieve the above targets and improvement in quality of public expenditure, it said.

Subsequently, it said, with current expenditures on a downward path and the quality of spending improving through a switch away from public consumption to investment, India's growth, introduction of the GST, and the associated revenue buoyancy can comfortably ensure the attainment of medium-term targets.

This buoyancy is assured by history because over the course of the growth surge over the last decade, the overall tax-GDP ratio increased by about 2-2.5 percentage points even without radical tax reform.

The survey said the medium-term fiscal strategy is based on fundamental principles of fiscal policy, as well as on the need to maintain fiscal credibility.

"Short-term targets should be set accordingly. This would assist the Government to take the Indian economy back to a durably higher growth path," it said.

"These considerations are reinforced by legacy and credibility issues. Adhering to fiscal deficit target set earlier is essential to maintain credibility and provide policy stability," it added.

The concrete actions in the Union to implement the medium-term fiscal strategy outlined above would lead to a comfortable attainment of the medium-term targets, it said.

To ensure fiscal credibility, and consistency with the medium-term goals, the upcoming should initiate the process of expenditure control to reduce both the fiscal and revenue deficits, it added.

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First Published: Fri, February 27 2015. 13:56 IST