India\u2019s fiscal landscape resembles that of a middle-class household striving to reconcile lofty aspirations with constrained means. The nation\u2019s ambitions\u2014spurred by the political vision of becoming a \u201cdeveloped\u201d country by 2047 and bolstered by its standing as the world\u2019s fourth-largest economy\u2014clash with the realities of limited resources and systemic inefficiencies. India\u2019s budgeting challenge is emblematic of a larger economic paradox: while it dreams big, structural and policy shortcomings threaten to tether its growth to unsustainable practices.
At the heart of this predicament lies the country\u2019s reliance on public investment to shoulder the burden of economic development. With private corporates largely risk-averse and the financial sector dominated by public sector banks, the government has taken on the role of an investor of last resort. Compounding the issue, micro, small, and medium enterprises (MSMEs), along with agriculture, are locked in low-productivity cycles, offering limited value addition and low-wage employment. Meanwhile, import tariffs protect inefficiencies, disincentivizing private sector innovation and competition. These dynamics not only exacerbate fiscal stress but also amplify project delays, which inflate costs and undermine returns. Astonishingly, India incurs an estimated annual cost of Rs 4.8 trillion due to project overruns\u2014equivalent to nearly 20% of original project budgets.
Borrowing to Bridge the Gap
To plug its resource gap, India relies heavily on borrowing. Remarkably, the nation has maintained a strong creditworthiness record, never defaulting on debt repayments. Fiscal rules ostensibly limit borrowing at both Union and state levels. However, the long-term sustainability of these restraints remains uncertain, especially in a global environment marked by burgeoning debt levels.
Emerging markets (EMs) have seen their government debt rise significantly from 44% to 69% of GDP between 2010 and 2023, outpacing the increase in advanced economies (AEs), where debt grew from 105% to 112% of GDP. India\u2019s public debt, already above the EM average at 65.6% of GDP in 2010, surged to 81.6% in 2023. This puts India in a precarious position: while its debt levels are closer to those of advanced economies, its per capita income remains far lower, trailing behind even high-income EMs like China.
The path to reducing public debt is fraught with challenges. It requires restraining new borrowing, boosting GDP growth above the current average of 6.5%, and fostering private investment to complement public spending. These steps, while necessary, are easier said than done.
Structural Imperatives for Growth
Achieving sustained economic growth necessitates structural changes. One crucial strategy is to attract foreign and domestic private investment by reducing risks and ensuring predictable returns. India must reposition itself as a reliable destination for foreign capital, leveraging the global realignment of supply chains with policies that welcome diverse investments. To do so, it should offer binding advance-tax guidance and contracts aligned with international best practices.
Reforming the financial sector is equally critical. Budget 2025 could address the imbalance in savings by eliminating the tax preference for equity investments over debt, thereby promoting diversified savings among the middle class. Strengthening regulatory oversight to curb reckless lending practices by banks and financial institutions is also essential.
Maintaining fiscal discipline is another cornerstone of fostering investor confidence. While fiscal deficit (FD) norms ostensibly limit government spending, adherence to these rules has been inconsistent. In 2017, the upper limit for the Centre\u2019s fiscal deficit was raised from 3% to 4% of GDP, pushing the combined FD (Union and states) to 7%. This was a clear shift in goalposts, given that the earlier norm of 6% of GDP was met only sporadically between 1983 and 2018. The fiscal fallout of the Covid-19 pandemic exacerbated the situation, with the general FD peaking at 13.1% in 2020-21. While it has since moderated, it remains elevated at around 7.9%, leaving little room for monetary flexibility.
The Inflation Puzzle
Inflation management presents another conundrum. Since 2016, the Reserve Bank of India (RBI) has been tasked with maintaining inflation within a 2-6% band, with a target of 4%. Although inflation declined from 6.21% in October 2024 to 5.22% in December 2024, it remains above the ideal target. Upside risks continue to loom, fueled by structural inefficiencies and fiscal pressures.
Efforts to statistically reduce inflation, such as the NCAER\u2019s recommendation to lower the weight of food in the Consumer Price Index (CPI) from 48.5% to 40%, highlight the importance of optics in a globally competitive environment. However, such adjustments do little to address the underlying economic realities.
Rethinking Priorities
India\u2019s approach to budgeting requires a paradigm shift. Prestige projects and populist spending\u2014ranging from grandiose infrastructure like the new Parliament building to freebies aimed at bolstering vote shares\u2014divert resources from high-value investments. Instead, spending should be directed toward projects with the greatest potential for economic returns, supported by accurate and current data to ensure targeted allocation.
Centralized spending further exacerbates inefficiencies. The Union government\u2019s bloated administrative machinery manages an ever-expanding number of schemes, with major programs doubling from 73 in 2017-18 to 170 in 2024-25. Each scheme adds administrative costs and dilutes the impact of funding. A more efficient approach would involve devolving financial and administrative responsibilities to state governments, allowing them to tailor solutions to local needs while adhering to national priorities.
The Road Ahead
India\u2019s fiscal challenges are symptomatic of deeper structural issues that cannot be addressed by short-term fixes. To achieve its aspirations of becoming a developed nation by 2047, India must embrace fiscal prudence, empower private investment, and prioritize targeted, high-impact spending. The Union government must shed its role as a fiscal supermarket and focus on strategic investments in national infrastructure, digital networks, and industrial innovation.
By tackling these challenges head-on, India can align its aspirations with its means, paving the way for sustainable growth and economic resilience in the decades to come.
Dipak Kurmi<\/p>\n","protected":false},"excerpt":{"rendered":"
India\u2019s fiscal landscape resembles that of a middle-class household striving to reconcile lofty aspirations with constrained means. The nation\u2019s ambitions\u2014spurred by the political vision of becoming a \u201cdeveloped\u201d country by 2047 and bolstered by its standing as the world\u2019s fourth-largest economy\u2014clash with the realities of limited resources and systemic inefficiencies. India\u2019s budgeting challenge is emblematic […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[395],"tags":[],"class_list":["post-468207","post","type-post","status-publish","format-standard","category-opinion"],"_links":{"self":[{"href":"https:\/\/nagalandpost.net\/index.php\/wp-json\/wp\/v2\/posts\/468207","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/nagalandpost.net\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/nagalandpost.net\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/nagalandpost.net\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/nagalandpost.net\/index.php\/wp-json\/wp\/v2\/comments?post=468207"}],"version-history":[{"count":0,"href":"https:\/\/nagalandpost.net\/index.php\/wp-json\/wp\/v2\/posts\/468207\/revisions"}],"wp:attachment":[{"href":"https:\/\/nagalandpost.net\/index.php\/wp-json\/wp\/v2\/media?parent=468207"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/nagalandpost.net\/index.php\/wp-json\/wp\/v2\/categories?post=468207"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/nagalandpost.net\/index.php\/wp-json\/wp\/v2\/tags?post=468207"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}