India must adhere to medium-term fiscal deficit target of 3% of GDP to provide the additional fiscal space required to ensure macro stability and provide cushion against future downturns, the Economic Survey 2014-15 said.
It would be crucial to maintain a firm control on government expenditure to achieve the set fiscal targets, while improving the quality of public expenditure.
Fiscal deficit is the measure of the amount of money the government borrows to fund expenses.
The government must adhere to the path of fiscal consolidation “to insure against future shocks. The recommended strategy would also take India closer in fiscal performance to that of its emerging market peers,” according to the survey.
It also underlined that there should be no delay in fiscal action and consolidation, and the government must focus on reduction and better management of subsidies and higher disinvestment proceeds.
The government, which projected a subsidy level of 2% of GDP in 2014-15, has also been advised by the 14th Finance Commission to further rationalise subsidy outflow to 1.4%, 1.2% and 1% of GDP in 2017-18, 2018-19 and 2019-20, respectively. The exercise, if implemented, would help the Centre save large amount of money.
“The survey has emphasised the importance of adhering to the fiscal deficit target, which was also underlined by the 14th Finance Commission a few days ago... it will not only boost investor sentiment but facilitate a growth-supportive monetary policy,” said DK Joshi, chief economist, Crisil.
The upcoming budget should initiate the process of expenditure control to reduce both the fiscal and revenue deficits, it said, adding, the quality of expenditure also needs to be shifted from consumption, by reducing subsidies, to investments.
“Adhering to fiscal deficit target set earlier is essential to maintain credibility and provide policy stability,” it added.