A recent report by EY India says enhanced government spending is vital for India’s Viksit Bharat vision.
EY India’s economy watch suggest the government to implement strategies to enhance tax revenues and un-lock tax resources while maintaining fiscal prudence.
The November edition of Economy Watch by EY India emphasizes the pivotal role of sustained economic growth and a well-structured fiscal strategy as key drivers for this transformation.
The EY India proposal emphasises four key areas which include increasing the size of government expenditure, recasting the FRBM framework, reforming fiscal transfers from the Centre to states, and reprioritizing expenditure allocations.
It says achieving developed economy status requires 7 per cent plus sustained GDP growth and a robust fiscal framework. The tax-GDP ratio needs to be raised to 25 per cent along with boosting non-tax revenue and reducing fiscal deficit.
D.K. Srivastava, Chief Policy Advisor, EY India said, “India’s aspiration to become a developed economy hinges on maintaining robust growth while addressing fiscal challenges. The suggested framework provides actionable insights for policymakers to enhance government expenditure, augment revenues, and ensure fiscal discipline. With concerted policy efforts, achieving Viksit Bharat by FY2048 is within reach.”
This requires a significant increase in the government’s total expenditure to 35 per cent of GDP (primary expenditure plus interest payments) from the current level of 29.1 per cent so far in FY24.
India’s primary expenditure should increase from 23.8 per cent of GDP to 31.4 per cent of GDP and be consistent with a developed country’s per capita GDP threshold.
This may be decomposed into primary revenue expenditure and capital expenditure of 25.4 per cent and 6 per cent of GDP respectively. Similarly, Interest Payments as a percentage of GDP should aligned with the Fiscal Responsibility and Budget Management (FRBM) Act and targeted at 3.6 per cent.
The Government’s tax-to-GDP ratio should rise to 25 per cent by FY2048. It has recently broken the ceiling of 18 per cent (18.5 per cent in FY24) after lingering between 16-18 per cent for more than 3 decades.
Non-tax revenues should be enhanced from 2.3 per cent of GDP to 4 per cent by leveraging untapped government resources such as land, minerals, and territorial waters.
General Government Fiscal Deficit requires an accelerated reduction from 8.4 per cent (FY24) to 6 per cent of GDP by FY2031 as fiscal consolidation will play a crucial role in reaching the goal of Viksit Bharat.
All these require forward-looking fiscal planning. These actions would significantly contribute to India’s sustained progress towards becoming a developed economy says the report.
