CII also highlighted 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.
Such an explicit target will have a positive impact on India’s sovereign credit rating and further on the interest rates in the economy, the Confederation of Indian Industry (CII) stated.
“To aid longer-term fiscal planning, the government should consider instituting Fiscal Stability Reporting. 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,” it said.
The reporting can also include long-term (10-25 years) forecasting of fiscal positions, accounting for the impact of factors like economic growth, technological change, climate change, demographic changes, etc. Several countries have adopted this proactive ranging from 10 years in Brazil to 50 years in the UK. “Looking at the next year’s budget, CII has suggested sticking to the fiscal deficit target of 4.9 per cent of GDP for FY25 and a target of 4.5 per cent for FY26. However, CII has also pointed out that overly aggressive targets beyond the ones mentioned could adversely affect growth,” the industry body said. CII has suggested three interventions to nudge states towards fiscal prudence.
Firstly, the states could be encouraged to institute state-level Fiscal Stability Reporting. Secondly, 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 the state’s fiscal health.
Third, the central government could create an independent and transparent credit rating system for states to incentivise them to maintain fiscal prudence.
The rating of states could be used to grant them greater autonomy in deciding how to borrow and spend. Additionally, the central government can use the Credit Rating of states as one of the parameters in deciding transfers to states, including for schemes like 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,” said Banerjee.
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 the Centre, he added.
