The Confederation of Indian Industry (CII) has urged the Centre to strike a careful balance between fiscal deficit targets and growth support in the upcoming budget, cautioning that overly aggressive deficit reductions could hinder economic growth.

The apex industry chamber has in its submissions for the upcoming Union Budget suggested sticking to the fiscal deficit target of 4.9 per cent of GDP for FY25 and pegging a target of 4.5 per cent for FY26. 

Noting that India has been growing rapidly amidst a slowing global economy, Chandrajit Banerjee, Director General, CII, said that prudent fiscal management for macroeconomic stability has been pivotal to this growth.

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Banerjee said that the fiscal management so far has maintained the perfect balance between the fiscal deficit and fiscal support to growth. This has provided macroeconomic stability to the economy and helped build resilience in an environment of great global economic uncertainty, he added.

Banerjee’s remarks on the need to safeguard growth impulses in the economy are particularly significant, as they come amid a sharp slowdown in India’s economic momentum. The country’s GDP growth in the second quarter hit a seven-quarter low of 5.4 per cent, prompting the Reserve Bank of India (RBI) to revise its full-year growth projection downward to 6.6 per cent from the earlier estimate of 7.2 per cent.

Glide path to reduce central debt 

CII has also welcomed the announcement in the Union Budget 2024-25 to keep the fiscal deficit at levels that help reduce the debt to GDP ratio. 

In preparation for this, the forthcoming budget could lay out a glide path to bring the Central Government’s debt to below 50 per cent of GDP in the medium term (by 2030-31), and below 40 per cent of GDP in the long term, CII has suggested. 

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Such an explicit target would have a positive impact on India’s sovereign credit rating, and further on the interest rates in the economy in general, it added.

Fiscal Stability Reporting 

To aid longer term fiscal planning, the Government should consider instituting Fiscal Stability Reporting, Banerjee suggested. This could include issuing annual reports on fiscal risks under different stress scenarios and the outlook for fiscal stability. The exercise will help forecast potential economic headwinds or tailwinds and assess their impact on the fiscal path.

The reporting can also include long-term (10-25 years) forecasting of fiscal positions accounting for impact of factors like economic growth, technological change, climate change, demographic changes, etc. Several countries have adopted this proactively ranging from 10 years in Brazil to 50 years in the UK.

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“In addition to the fiscal prudence at the Centre, fiscal prudence at the State level is equally crucial for the overall macroeconomic stability and fiscal sustainability. Today the combined spending by State governments is higher than that of Union Government”, Banerjee added.

CII has suggested three interventions to nudge the states towards fiscal prudence

One, the States could be encouraged to institute State level Fiscal Stability Reporting.

Two, States have been allowed to borrow directly from the market, following the recommendations of the 12th Finance Commission. States also provide guarantees in case of borrowing by State PSEs, which have implications for State’s fiscal health.

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Three, the Union Government could create an independent and a transparent credit rating system for the states to incentivize them to maintain fiscal prudence. Rating of states could be used to grant them greater autonomy in deciding how to borrow and spend. Additionally, the Central Government can use Credit Rating of states as one of the parameters in deciding transfers to states, including for schemes such as “Special Assistance as Loan to States for Capital Expenditure”.

Such rewards will act as a strong incentive for State Governments to prioritise fiscal prudence and fiscal sustainability of state finances, Banerjee said.