New Delhi: The government must create additional fiscal space and use the resources to boost public investment for promoting growth on sustained basis, says the Economic Survey.
"The increase in fiscal space, including that gained from subsidy reductions and higher disinvestment proceeds should be devoted to public investment," Finance Minister Arun Jaitley said in the Survey, tabled in Parliament Friday.
The nation's public finances need to be set back on the path toward fiscal deficit of 3 percent of GDP, as planned in FRBM (Amendment) Act 2012, stated the pre-Budget document.
"To do this, concrete actions will be needed in this budget to control expenditure via subsidy reductions, improve its quality in altering the mix between public consumption and investment in favour of the latter, and move India toward the golden rule of borrowing only for public investment," it said.
Public investment, especially in the railways, will have to play an important role at least in the interim, to revive growth and to deepen physical connectivity, it added.
The Survey prescribes what it calls, a golden rule of fiscal policy saying that governments are expected to borrow over the cycle only to finance investment and not to fund current expenditures.
"India must meet its medium-term fiscal deficit target of 3 percent of GDP. This will provide the fiscal space to insure against future shocks," it said.
"The space is necessary to insure against future shocks. The recommended strategy would also take India closer in fiscal performance, to that of its emerging market peers," it added.
The fiscal action cannot wait. It should continue in the upcoming year as well, it said.
The Survey noted that macro-economic circumstances have improved dramatically in India.
Macro-economic pressures have abated and as per the latest estimates for the GDP (2014-15), the growth has exceeded that in most countries including China, it said.
"Provided that fiscal discipline is maintained, India's debt dynamics will consequently remain exceptionally favourable going forward," it added.
The Survey said there is a need for accelerated fiscal consolidation in view of reduced macroeconomic pressures. It outlined the two pillars of this medium-term strategy -- reduction of deficits and expenditure control and switching.
It has suggested reduction of fiscal deficit over the medium term to the established target of 3 percent of GDP and moving towards the golden rule of eliminating the revenue deficit.
The survey has recommended that borrowing should be only for capital formation and not to fund current expenditures.
There is a need to maintain a firm control on expenditure to achieve the targets and effect improvement in the quality of public expenditure, it said.
Subsequently, with current expenditure on a downward path and the quality of spending improving through a switch away from public consumption to investment, India's growth, introduction of the GST, and the associated revenue buoyancy can comfortably ensure the attainment of medium-term targets, it added.
This buoyancy is assured by history because over the course of the growth surge over the last decade, the overall tax-GDP ratio increased by about 2-2.5 percentage points even without radical tax reform, it said.
The survey said the medium-term fiscal strategy is based on fundamental principles of fiscal policy, as well as on the need to maintain fiscal credibility.
"Short-term targets should be set accordingly. This would assist the Government to take the Indian economy back to a durably higher growth path," it said.
"These considerations are reinforced by legacy and credibility issues. Adhering to fiscal deficit target set earlier is essential to maintain credibility and provide policy stability," it added.
"There is no ground for complacency...The concrete actions in the Union Budget to implement the medium-term fiscal strategy outlined above would lead to a comfortable attainment of the medium-term targets," it said.
The loss in fiscal discipline led to the near-crisis in 2013 and on pure fiscal measures, India does not rank as favourably as its investment grade peers, it said.
To ensure fiscal credibility, and consistency with the medium-term goals, the upcoming budget should initiate the process of expenditure control to reduce both the fiscal and revenue deficits, it added.
