Mains Daily Question
Nov. 29, 2021

What do you understand by fiscal consolidation? What are the factors that should be considered for fiscal consolidation by the government?

Model Answer

Fiscal Consolidation refers to the policies undertaken by Governments (national and sub-national levels) to reduce their deficits and accumulation of debt stock. Thus, it is a process where government’s fiscal health is getting improved and is indicated by reduced fiscal deficit. Improved tax revenue realization and better aligned expenditure are the components of fiscal consolidation as the fiscal deficit reaches at a manageable level.

In India, fiscal consolidation or the fiscal roadmap for the centre is expressed in terms of the budgetary targets to be realized in successive budgets. The Fiscal Responsibility and Budget Management (FRBM) Act gives the targets for fiscal consolidation in India.

Following factors from the expenditure side and revenue side should be considered by the government to achieve fiscal consolidation.

  • Improved tax revenue realization by implementing measures like 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.

The appropriate amount of fiscal consolidation for each country will depend on a number of factors, including the strength of its economy, the public debt and interest developments, the ease of financing debt, and political decisions concerning taxes and spending

Higher economic growth rate will help government to get higher tax revenues as well. Augmentation of tax revenue is necessary to bring fiscal consolidation as there are limitations for reducing government expenditure in India.

Subjects : Economy
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