Speaking at a National Institute of Public Finance and Policy (NIPFP) event, Rao highlighted how accumulated fiscal risks amplify external shocks, crowding out private investment, eroding confidence, spurring inflation, unemployment, and rupee depreciation, which is now nearly 10 per cent in the recent fiscal year, making it Asia’s worst-performing currency.
Post-1991 reforms failed to stem rising deficits, leading to the 2003 Fiscal Responsibility and Budget Management Act targeting 6 per cent of GDP, benchmarked against household savings of 10 per cent. Yet Rao noted this target was met only once, in 2007-08; household savings have since slumped to 5.4 per cent in 2023-24, yet the outdated 6 per cent goal lingers unchallenged.
Slippage is stark at the Centre, where Article 293(3) constrains state borrowing but leaves Union profligacy unchecked, despite states facing scrutiny for power sector woes and electoral freebies like loan waivers and free travel.
“Macroeconomic civilisation is predominantly a Union function. It is not the state function,” he stressed.
Rao warned that GST revenues are underperforming. He called for bolder fixes: cut exemptions and composition schemes that encourage informal activity, and bring petroleum into GST to end massive cascading—37 per cent of the Centre’s consumption taxes stem from it, while states like Kerala face up to 52 per cent from petroleum and electricity duties.
Rao also slammed the explosion of centrally sponsored schemes (CSS). Five schemes gobble over 50 per cent of CSS grants, locking up 40 per cent of state spending and undermining fiscal federalism, especially without clear targets for minimum service standards.
He emphasised that the goal of Viksit Bharat can be achieved only if you exercise control over the deficit. “Ultimately you need to increase the investment to at least 40 per cent of GDP, which is currently at 30 per cent, and this cannot be achieved with such a high borrowing cost,” Rao concluded.
In a separate discussion, former Reserve Bank of India (RBI) Governor C Rangarajan underscored fiscal policy’s central role in India’s economy while flagging historical vulnerabilities in deficit financing and urging tax buoyancy above one to support rising expenditures.
“Fiscal policy is an important tool of economic administration. Fiscal actions directly affect the income and expenditure stream. In a developing country like India, fiscal policy is a tool for both development and stability,” Rangarajan stated.
Rangarajan stressed the “most important interface” lies with the government, balancing financial support and research discretion. “Financial aid is very much at the discretion of the government. But if the government wants good research it has to be liberal,” he said, urging a “give and take” to preserve this “valuable tradition” amid funding dependencies common to such institutions.
He reflected on his own pivot to public finance via the monetary-fiscal nexus, where 1980s borrowing excesses, despite statutory liquidity ratio (SLR) hikes to 38 per cent, spurred ad hoc treasury bills and RBI monetisation of deficits.
“Important changes can be introduced only when the government actively interacts with academics and outside experts,” he noted.
Rangarajan called for fiscal adaptation to shifting government priorities. “More market does not mean less government, but different government,” with social infrastructure needs taking precedence. A direct and indirect tax system boasting buoyancy greater than one is essential, he argued, dismissing yearly rate adjustments. Deficits must stabilise at levels matching household financial savings, alongside enhanced state-level engagement.
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