India’s Fiscal : Near-term Performance and Medium-term Imperatives

Strange as it may seem, the backdrop to Union Budget 2023–24 was more conflicting than the recent years. Over the last few years, at least the intellectual consensus was clear. The pandemic year called for a forceful fiscal response, while the last two budgets called for a gradual tapering of fiscal support as the pandemic retreated and the economy began to recover. To be sure, the Russia–Ukraine war complicated 2022–23 fiscal math, because the surge in commodity prices necessitated higher subsidies to buffer the economic agents from some of the shock. But, to its credit, budget 2022–23 had implicitly provisioned for some fiscal buffers, by budgeting revenues overly conservatively. Those buffers, in turn, allowed the budget to absorb higher subsidies without derailing the fiscal math.

So, why was FY 2023’s backdrop so challenging? Primarily, because there were multiple, ostensibly conflicting, objectives. (i) Some fiscal con­solidation was imperative given the level of starting points. Despite the fact that states overconsolidated in FY 2022 (reducing their deficit from 4.1% in FY 2021 to 2.8% of gross domestic product [GDP] in FY 2022, which seemed excessive given the nascent recovery at the time) and the union is likely to stick to its budgeted deficit of 6.4% of GDP in 2023–24, India’s public sector borrowing requirement (PSBR) will still be much above 9% of GDP in FY 2023. Even though concerns about crowd­ing out may be premature, given the state of private investment, the need to consolidate is best understood by appreciating the link between the “twin deficits.”