The division of key portfolios in the third Narendra Modi government indicates continuity in policy. This should give confidence to financial markets, which were somewhat shaken after the election results. However, while broad continuity will help boost confidence in the short term, policy needs to evolve with changing circumstances. In this context, Union Finance Minister Nirmala Sitharaman will be expected to build on the foundations of recent years. His last term was perhaps the most difficult a finance minister has faced in recent memory, largely due to pandemic-related shocks. Although India has managed a strong recovery from the pandemic, continued efforts will be needed to sustain growth and repair the country’s fiscal position. The Indian economy expanded by 8.2 percent in 2023-24 and is expected to grow at around 7 percent this fiscal.

On the fiscal front, the government is on track to achieve a medium-term fiscal deficit target of 4.5 percent of gross domestic product (GDP) in 2025-26. Better-than-expected revenue collection and economic growth brought the fiscal deficit to 5.6 percent in the last fiscal year, against the revised estimate of 5.8 percent in the interim budget. For the current year, surplus transfers expected by the Reserve Bank of India (RBI) will support government finances. As Ms Seetha Raman and her team begin preparing the full budget – expected in July – she will be well advised to reduce the fiscal deficit and bring it closer to the medium-term target. Use additional transfers from RBI for Given the new political landscape, there is likely to be pressure for additional spending.

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However, the government should not give up the hard-earned financial gains of the past few years. In fact, it would be advisable to introduce a revised fiscal guide to bring the fiscal deficit down to 3 percent of GDP. This will be important to bring the debt-to-GDP ratio to a more manageable level. India’s general public debt is expected to remain above pre-pandemic levels at least through 2029, according to International Monetary Fund estimates. In case of increase in revenue, the central government should immediately initiate the process of rationalization of rates and slabs of goods and services. Tax (GST) in GST Council. This will not only help in revenue collection but also improve the ease of doing business.

One of the potential challenges in reducing the fiscal deficit will be its impact on growth. Economic growth in the post-pandemic period is largely driven by government capital spending. With continued financial stability, the private sector will need to fill the investment gap. However, the private sector appears reluctant to significantly expand capacity, citing weak domestic demand. While demand in rural India is expected to recover with a normal monsoon, India must also focus on meeting global demand. The government has increased tariffs in recent years, affecting external competition. While the Ministry of Finance should now review the effectiveness of higher tariffs to achieve higher sustainable growth, a whole-of-government approach will be needed to attract investment and accelerate growth. The new government’s first full budget will be closely watched for indications of how the government intends to take the Indian economy forward.



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