Fiscal policy reforms can help boost countries’ long-term growth prospects.

Fiscal policy reforms can help boost countries’ long-term growth prospects.

The study finds that fiscal reforms, especially when complemented with supportive changes in other economic policies (structural reforms), can support strong and equitable growth. It draws on the lessons from nine country case studies (Australia, Chile, Germany, Ireland, Malaysia, the Netherlands, Poland, Tanzania, and Uganda), as well as an analysis of growth accelerations (defined as increases of at least 1 percentage point in five-year average growth following fiscal reforms).

Higher public spending now would make it longer before India returns to the 65% “suitable” ballpark. But more importantly, if unexpected macro shocks strike during this period, debt ratios could remain “unsuitable” for the foreseeable future. India has two key priorities for 2016—preserving hard won macro stability and reviving growth. Macro stability can mean different things at different times. On the growth front, with private investment largely absent from the scene and prospect for exports unexciting, government spending may need to lend a helping hand. The problem here is that while on good days the twin objectives of higher growth and lower public debt can fall into a virtuous cycle, on a bad day, any one of them derailing can drag down the other. India’s public debt ratio has risen from 65.5% of gross domestic product (GDP) in financial year (FY) 2013-14 to 67% in FY15 and is likely to rise further in FY16, thanks to falling inflation and lacklustre growth.

Fiscal reforms needed:

So is there a way out for a government that wants to support growth via higher public spending and yet maintain macro stability. If the government is able to undertake a few important fiscal reforms, it can generate enough funds over a short period of time to finance the extra spending.

• Food and fertilizer subsidy reforms: Unlike oil subsidy, these have not seen any significant rationalisation. Using the unique identity, Aadhaar platform, in the delivery of these subsidies and moving from product to cash subsidies will not just bring fiscal savings, but also growth gains if the savings are used to finance government investment.
• Government stake sales: There are large gains to be had by outlining a clear roadmap for disinvestments and allowing independent market experts to decide on timing. SUUTI (Specified Undertaking of UTI) sales alone can provide 0.35% of GDP worth of funds, and lowering government ownership across other companies can provide a further boost. Over the last few years, there has been a dismal below expected 0.2% of GDP in disinvestment receipts, which can be easily notched up.
• Tax revenue improvements: Removing concessional rates and special exemptions from excise and custom duties would not only reduce market distortions, but also add to the tax kitty. Strengthening tax administration by plugging gaps in collection or reporting procedures, strengthening data-warehousing infrastructure, increasing manpower and fast tracking tax disputes are potential reforms.

These reforms alone can provide an extra 0.4% of GDP worth of resources each year for the next few years. Using these savings to nudge up public investment will not only help keep debt levels in check, but also make the economy more resilient in the face of macro shocks. It would provide those extra funds to boost public investment without having an adverse impact on interest rates. And finally it will allow the government to stick to its fiscal consolidation path.