X NOTES: Economic Survey 2015

Introduction

In the medium term, 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 and also to move closer to the fiscal performance of its emerging market peers.
the way to achieve these targets will be expenditure control, and expenditure switching from consumption to investment.
From 2016-17, as growth gathers steam and as the GST is implemented, the consequential tax buoyancy when combined with expenditure control will ensure that medium term targets can be comfortably met.
In the upcoming year, the pressures for accelerated fiscal consolidation have been lessened because macro-economic pressures have significantly abated with the dramatic decline in inflation and turnaround in the current account deficit.

Inflation has been cut in half to about 5 percent today, underlying rural wage growth has declined from over 20 percent to below 5 percent, and the current account deficit has shrivelled from over 6.7 percent of GDP (in Q 3, 2012-13) to an estimated 1.0 percent in the coming fiscal year.
At least three phases of policy can be distinguished since the early 2000s: 2002-2007; 2008-2011; and post-2012

In the first phase, all key measures of fiscal performance improved dramatically, driven largely by rapid growth.
The fiscal deficit of the central government declined by nearly 3.2 percentage points, accounted for largely by an increase in the tax-GDP ratio along with a decline in other non-debt receipts and the rest by expenditure reductions.
The second and difficult phase of Indian fiscal history began with the Lehman crisis in 2008-09 and lasted four years.
nearly all the positive trends of the previous six years were reversed.
In the initial years (2008-09 to 2011-12), current expenditures (public consumption) increased dramatically due to the rising subsidy bill; the increase in pay and allowances because of implementation of the Sixth Pay Commission recommendations; and schemes that built in permanent entitlements such as MGNREGA.
In the third and most recent phase, from 2012-13 to 2014-15, which was characterized by a sharp growth slowdown, the fiscal position finally began to be repaired.
India experienced a near-crisis during July/August 2013, as the conjunction of the U.S. Federal Reserve's decision to taper its monetary stimulus and India's growing current account deficit, high inflation, and still-large fiscal deficits caused capital to flee the country.
Gave a lesson that India needs to create additional fiscal space, in order to ensure macro stability and to create buffers for economic downturns in the future.

The golden rule of fiscal policy is that governments are expected to borrow over the cycle only to finance investment and not to fund current expenditures.
the government should target steady declines in the revenue deficit to move closer to the golden rule.
the medium-term fiscal strategy should be based on two pillars. First, the fiscal deficit should be reduced over the medium-term to the established target of 3 percent of GDP.
Second, and mindful of the experience of the past decade, efforts to achieve this objective should be based on firm control over expenditures, most notably by eliminating leakages in subsidies and social expenditures.

In the short-run, fiscal policy serves as a cushion, stabilizing demand and growth.
accepted rule is that from a demand management perspective governments should not run a procyclical fiscal policy unless there are compelling factors such as macro-conomic overheating.
these factors weaken the case for pro-cyclical policy.

The Fourteenth Finance Commission recommendations. Centre would have to pay more.
GST in 2016/17 was facilitated by the offer of the government to compensate the states for the backlog of CST compensation of up to 25,000 crores.
increase public investment to revive private investment and growth.

Macro-economic circumstances have improved dramatically in India.
Provided that fiscal discipline is maintained, India's debt dynamics will consequently remain exceptionally favourable going forward.
At the same time, India's fiscal situation is close to that about ten years ago at a comparable stage of the cycle. In other words, the stimulus provided in the last few years has mostly been withdrawn.
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.
India must meet its medium-term target of fiscal deficit of 3 percent of GDP. India must also reverse the trajectory of recent years and move toward the golden rule of eliminating revenue deficits and ensuring that, over the cycle, borrowing is only for capital formation.
These trends need to be reversed, and 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.