Debt and fiscal consolidation

Subject: Economy

Context:

15^th Finance commission chairperson N.K.Singh has suggested government should concentrate on interventions and fastest possible revival of the economy rather on debt and fiscal consolidation at present

Concept:

Debt

• Public debt is the total liabilities of the central government contracted against the Consolidated Fund of India.
• The debt-to-GDP ratio indicates how likely the country can pay off its debt. Investors often look at the debt-to-GDP metric to assess the government’s ability of finance its debt.
• Union government has followed a considered strategy to reduce its dependence on foreign loans in its overall loan mix.
• Internal debt constitutes more than 93% of the overall public debt. Also, note that external loans are not market loans. They have been raised from institutional creditors at concessional rates. Most of these external loans are fixed-rate loans, free from interest rate or currency volatility.
• Internal loans that make up for the bulk of public debt are further divided into two broad categories – marketable and non-marketable debt.
• The NK Singh Committee on FRBM had envisaged a debt-to-GDP ratio of 40 per cent for the central government and 20 per cent for states aiming for a total of 60 per cent general government debt-to-GDP.

Status Paper on Government Debt

• The central government’s debt as a percentage of GDPdropped marginally by 0.1% from 45.8% in fiscal 2017-18 to 45.7% or Rs 86.73 lakh crore in FY19
• Following a similar trend, the general government debt to GDP ratio, which includes the combined debt of the Centre and states, declined by the same percentage from 68.7% in March 2018 to 68.6% or Rs 1.3 crore crore (Rs 130 trillion) in March last year.
• The government’s finances were largely protected from currency risks as external debt stood at 2.7% of GDP or Rs 5.12 lakh crore in FY19. Further, as this was entirely from official sources, India was protected from volatility in international markets.
• 1 per cent of total Central Government debt at end-March 2019 was domestic debt

Fiscal consolidation

• Fiscal Consolidation refers to the policies undertaken by Governmentsto reduce their deficits and accumulation of debt stock.
• Fiscal consolidation is a process where government’s fiscal health is getting improved and is indicated by reduced fiscal deficit.
• Measures taken by the government to achieve fiscal consolidation.
• Improved tax revenue realization: For this, increasing efficiency of tax administration by reducing tax avoidance, eliminating tax evasion, enhancing tax compliance etc. are to be made.
• Enhancing tax GDP ratio by widening the tax base and minimizing tax concessions and exemptions also improves tax revenues.
• Better targeting of government subsidies and extending Direct Benefit Transfer scheme for more subsidies.