Fiscal reforms: Key To Development

Without further Fiscal Reforms, the Indian government may find it difficult to sustain the increase in public investment spending, according to a report, titled India’s Fiscal Roadblocks could stall infrastructure progress, that Standard & Poor’s Ratings Services published.

“Although India’s budgetary performances have strengthened in recent years, its hard-won fiscal improvements could yet unwind because of the financial or commodity shock,” said Standard and Poor’s credit analyst Kim Eng tan. Another constraint is the heavy government debt. The report notes that the central government budget deficit in India has fallen in recent years, relative to GDP. However, the latest-year deficit reduction didn’t come easy.

Disappointing tax collections, especially services tax collection, dragged estimated total revenue for the fiscal year ended March 2015 6.3% below the central government’s initial budget projection. The government had to cut spending by a similar proportion to prevent the budget shortfall from widening. Since the subsidy bill came in above expectations, the government made significant cuts to capital investments to bring spending down.

The central government’s willingness to cut spending to rein in the budget deficit indicates the high priority of fiscal prudence on its agenda. From an institutional and governance point of view, this supports the sovereign creditworthiness. The large interest payments and subsidy spending in budgetary expenditure are signs of fiscal risks because they leave little for the central government to spend at its discretion, after necessary social services expenditure.

Further constraining public infrastructure financing is the government’s relatively small share GDP that it collects as revenue. This is why public investment has been persistently lower than that of some other developing countries. The central bank looks intent to change this.

Click here for government certifications