The fiscal consolidation roadmap, the Central Government, is one of the terms of reference of the 15th Finance Commission. The 15th Finance Commission was constituted on November 27, 2017, under Article 280 (1) read with Article 280 (3) (a) and (b) and paragraphs 1 and 2 of Part XVII B of the Constitution for making recommendations for distribution between Union and States and among States themselves the net proceeds from taxation during the period 2020-2025.
Committee that recommended the policy of consolidation
The FRBM Review Committee was constituted by the 15th Finance Commission as well. The constitution of this Committee is an important step in the right direction since it will help the country’s economy recover from the pandemic. The central Government’s high debt to GDP ratio is a cause for concern because it impacts public spending on infrastructure and social welfare schemes. The Finance Commission’s decision to constitute this review committee will help ease India’s fiscal health concerns.
Country’s macroeconomic policy. Roy is a well-known economist and has served as the National Institute of Public Finance and Policy Director. Chenoy is an economist at JP Morgan, while Sanyal is the Principal Economic Advisor to the Finance Minister.
The 15th Finance Commission was constituted in November 2017 with Singh as its Chairman, with four other full-time members — Shaktikanta Das, Anoop Singh, Ashok Lahiri, and Ramesh Chandra. The five representatives from states on it are Ajay Narayan Jha (Chief Secretary), V K Sharma (Chief Secretary), Arvind Mehta (Secretary to Government of Gujarat), Sudipto Mundle (National Institute for Public Finance & Policy Formerly Professor), and Ramesh Chand Committee will be a permanent one.
Factors that helped in fiscal consolidation
14th Finance Commission and adopted the financial proposals contained therein. The 14th Finance Commission (FFC) had recommended a new fiscal framework based on medium-term strategy, a credible roadmap for fiscal consolidation, and transparency in fiscal reporting. In pursuance of this recommendation, a new Act, i.e., The Fiscal Responsibility and Budget Management (FRBM) Act, was enacted to lay down fiscal policy objectives and fiscal discipline norms in line with the recommendations of the FFC.
According to the press release, the Committee will be chaired by NK Singh, Chairman of the 15th Finance Commission.
The mandate for the Committee includes:
- Reviewing the status and performance of the fiscal consolidation process in India;
- Analysis of various aspects like government debt, revenue deficit and effective revenue deficit, etc.
- Bringing out a perspective on achieving fiscal discipline, including seeking an optimal balance between revenue deficit and capital expenditure;
- Providing its perspective on various alternative fiscal consolidation roadmaps for consideration of the Government based on analysis of past trends and future outlook.
The fiscal consolidation process
Fiscal consolidation is a process through which governments take action to reduce their overall levels of debt. It usually involves taking steps such as cutting public spending or raising taxes in order to reduce the deficit and improve the credit rating.
Governments can use fiscal consolidation to improve the public finances or put them on a sustainable footing. In other words, governments can achieve greater financial security for themselves by taking steps that will result in less debt in future years.
Fiscal consolidation is when a central or state government cuts down the budget deficit and brings down the debt-to-GDP ratio. This can be achieved through expenditure cuts and revenue increases. A fiscal consolidation strategy is a government’s plan to reduce its budget deficit. Typically, fiscal consolidation involves reducing The process by which a central or state government cuts down the budget deficit and brings down the debt-to-GDP ratio spending and raising taxes. Fiscal consolidation and fiscal adjustment are often used interchangeably.
- Reduce a country’s debt-to-GDP ratio. The fiscal consolidation process is often used to describe measures taken to reduce a budget deficit and make the national debt more sustainable. For example, if a government is spending 15% of its GDP every year servicing debt, it could find itself in serious trouble as that percentage increases and tax revenues fall because of the recession.
- Reduce the risk of fiscal crises. Countries may be more inclined to use fiscal consolidation processes during times of economic crisis in order to avoid defaulting on their loans or being forced into austerity programs by outside agents such as the International Monetary Fund (IMF). But fiscal consolidations can occur at any time when the Government believes it needs to reduce spending or increase revenue.
Though some economic experts are unclear about whether lowering interest rates will boost the economy, what is clear is that this unprecedented venture has indicated a change in the way the ECB approaches its monetary policy. The bank’s new approach to interest rates can seriously affect economies. The European Central Bank (ECB) reduced interest rates below zero for the first time to stimulate economic growth. The central Government’s high debt to GDP ratio is a cause for concern because it impacts public spending on infrastructure and social welfare schemes.