The Hindu Newspaper Analysis

Editorial Topic : Stick to Fiscal Deficit as the Norm for Fiscal Prudence

 GS-3 Mains Exam : Economy

Revision Notes

Introduction

• High Fiscal Deficit: Excessive government spending over revenue can lead to economic difficulties.
• 1980s Crisis: Rising fiscal deficit and government debt caused a balance of payments crisis and increased interest payments, forcing borrowing for developmental expenditures.

Key Budget Pointers

• Budget 2024-25 Targets:

• • The fiscal deficit target is 4.9% of GDP for 2024-25, with plans to reduce it to 4.5% by 2025-26.
  • By 2026-27, the government aims to reduce the fiscal deficit annually to lower central government debt as a percentage of GDP.

• Centre’s Debt-GDP Ratio:

• • Estimated at 54% in 2025-26, assuming nominal GDP growth of 10.5%.
  • The government will aim for a declining debt-GDP ratio without setting a concrete target after this.

• Abandoning FRBM Target:

• • The Fiscal Responsibility and Budget Management (FRBM) Act 2018 set a 40% debt-GDP target for the Centre and 60% for combined government debt. This target is being effectively postponed.

• Long-term Debt Projections:

• • With nominal GDP growth of 10%-11%, the Centre’s debt-GDP ratio is projected to fall to 48% by 2048-49 if the fiscal deficit stays at 4.5% of GDP.

• State Government Targets:

• • States have adopted a 3% fiscal deficit-GSDP target in their Fiscal Responsibility Legislations (FRLs). However, many states may shift focus to reducing debt-GSDP ratios.
  • If states and the Centre maintain fiscal deficits of 4.5% and 3% respectively, the combined deficit could average 7.5% of GDP for several years.

• Limited Private Sector Investment Space:

• • A combined fiscal deficit of 7.5% would limit the space for private sector investments unless the current account deficit (CAD) is increased beyond sustainable levels.

Private Sector Investment Scope

• Twelfth Finance Commission:

• • It argued that the investible surplus for the private and non-government public sector comes from household financial savings and foreign capital inflows, after accounting for government borrowing.

• Key Observation:

• • If household savings are 10% of GDP and the current account deficit is 1.5%, it supports a 6% fiscal deficit for the government, 4% private sector investment, and 1.5% public enterprises absorption.

• Declining Household Savings:

• • Household savings dropped to 5.3% of GDP in 2022-23, down from 7.6% before 2020-21.
  • With only 5.3% in savings and 2% from foreign capital, the total investible surplus of 7.3% is fully absorbed by the combined 7.5% government fiscal deficit, leaving little room for private sector investments unless savings increase.

Link Between Fiscal Deficit and Debt-GDP Ratio

• Debt-GDP Relationship:
  • A reduction in the debt-GDP ratio depends on lowering the fiscal deficit, which translates into a yearly change in the ratio.
• Fiscal Responsibility Framework:
  • Since 2003, India’s fiscal responsibility framework has linked debt-GDP ratios with fiscal deficit levels through the Fiscal Responsibility and Budget Management Acts (FRLs) at both central and state levels.

Indian Scenario

• High Debt-GDP Ratio:
  • A high debt-GDP ratio leads to higher interest payments, reducing the funds available for developmental and non-interest expenditures.
• Interest Payments and Revenue Receipts:
  • The Centre’s interest payments as a percentage of revenue receipts (excluding tax devolution) rose from 35% in 2016-17 to an average of 38.4% between 2021-22 and 2023-24.
  • Including tax devolution and grants, the ratio averaged 51.6% of revenue receipts.

International Comparison

• Other Countries with High Debt-GDP Ratios:

• • Countries like Japan, the UK, and the US have higher debt-GDP ratios than India but lower interest payments relative to revenue receipts:
    • Japan: 5.5%
    • UK: 6.6%
    • US: 8.5% (2015-19 averages)

• India’s Interest Payments:

• • In contrast, India’s interest payments averaged 24% of revenue receipts (2015-16 to 2019-20), with the Centre’s post-transfer ratio averaging 49%.

• Policy Challenges:

• • India lacks clear targets and pathways to reduce its debt-GDP ratio.
  • The central debt-GDP ratio surged from 50.7% in 2019-20 to 60.7% in 2020-21 due to the COVID-19 pandemic. The return to pre-pandemic levels has been slow.

Macroeconomic Shock and Debt-GDP Adjustments

• Asymmetric Adjustments:
  • Reducing debt-GDP ratios after a macroeconomic shock like the pandemic takes longer, with governments often delaying adjustments while continuing high interest payments.

Conclusion

• Fiscal Discipline:
  • To ensure fiscal prudence, India must adhere to a 3% fiscal deficit-to-GDP limit, especially given the lower levels of household savings.
• Roadmap to 3% Fiscal Deficit:
  • There is an urgent need for a clear plan to achieve this fiscal deficit limit, as further relaxation will lead to fiscal imprudence and crowd out private investment.
• Comprehensive Approach:
  • The government must adopt a comprehensive fiscal policy approach that considers both public and private sector needs while maintaining a focus on fiscal discipline.

 

 

The Hindu Newspaper Analysis

Editorial Topic : A Tourism Policy Ill-Suited for Jammu and Kashmir

 GS-3 Mains Exam : Economy

Revision Notes

Context:

• Need for sustainable tourism: Jammu and Kashmir’s fragile environment is facing damage due to current tourism policies. A resilient model is essential for preserving the ecosystem.

Introduction:

• Kashmir as Eden: Historically regarded as a paradise, Kashmir’s environment has deteriorated due to urbanisation and commercialisation.
• Climate change effects: Visible impact on the region, further degrading its natural beauty.

Effects of New Tourism Policy:

1. Ecological Concerns:

1. • Tourism pressure: The new policy, introduced after the dilution of J&K’s special status, aims to project normalcy but has caused severe environmental stress.
   • Tourism boom: Over 4 crore tourists since the new policy of 2020. In 2024’s first half, 1.2 million tourists arrived.

2. Environmental Damage:

1. • Tourism escalation: Government efforts to promote stability have led to unregulated growth in tourism, disturbing the ecological balance.
   • Waste management: Inadequate systems have led to pollution, especially in waterbodies like Dal Lake, increasing environmental degradation.

3. Pilgrim Tourism:

1. • Strain on ecosystems: Pilgrimage destinations like Pahalgam and Trikuta Ranges (Mata Vaishno Devi) have seen significant tourist increases, harming fragile areas.

4. Core Environmental Issues:

1. • Over-tourism: The region is witnessing deforestation, waste buildup, and unregulated infrastructure growth.
   • 2014 floods reminder: Unregulated tourism contributed to the 2014 catastrophic floods, showing the risk of unchecked growth.

5. Infrastructure Expansion:

1. • Unsustainable infrastructure: New hotels, roads, and recreational facilities disrupt natural habitats.
   • Construction impact: Encroachment into wildlife areas, deforestation, and soil erosion are increasing, threatening local biodiversity.

6. Rising Utility Demands:

1. • Water and electricity strain: Groundwater extraction is depleting aquifers, and the rising energy demand increases reliance on hydroelectric projects, which alter local aquatic ecosystems.

7. Water Shortage and Agricultural Challenges:

1. • Water scarcity: Climate change and glacial depletion are creating drinking water shortages.
   • Agricultural drought: Erratic weather patterns and below-average rainfall are affecting crop yields, threatening food security and creating economic stress for farmers.

Fragility of the Region:

1. Natural Disasters:

1. • Disaster-prone: Jammu and Kashmir faces earthquakes, floods, landslides, and avalanches.
   • Seismically active: The region lies in a seismically active zone, increasing vulnerability.

2. 2014 Floods:

1. • Impact: The floods submerged large parts of the Valley, displacing thousands and causing ₹5,400-₹5,700 crore in economic losses.
   • Affected population: 5 million people were impacted, with 4.5 million in the Valley and half a million in the Jammu region.

3. Development vs. Environment:

1. • Road construction: Efforts to improve accessibility to tourist spots often disrupt ecosystems.
   • Kerala example: The Wayanad landslide (over 200 lives lost) is a stark reminder of the dangers of unchecked development in sensitive areas.

4. Flash Floods in 2022:

1. • Cloudburst near Amarnath: Caused 16 deaths and 40 missing, highlighting the risk of climate-related disasters.

Way Forward: A New Model

1. Eco-Friendly Tourism:

1. • Sustainable practices: Reducing waste, conserving water, and protecting biodiversity must be prioritised to preserve the region’s environment.

2. Involvement of Local Communities:

1. • Tourism planning: Local communities should be included in decision-making to ensure tourism benefits the region without harming its environment.

3. Building Resilience:

1. • Adaptation to climate extremes: Infrastructure should be designed to withstand extreme weather conditions.
   • Diversifying tourism: Move beyond seasonal tourism to reduce pressure during peak times and ensure year-round sustainable growth.

4. Long-term Strategy:

1. • Balanced policies: Adopt policies that balance economic development with environmental conservation and social equity.
   • Focus on sustainability: Tourism must be a long-term economic driver without compromising Kashmir’s natural beauty.

Conclusion:

• Urgency of change: The current tourism model is unsustainable and poses a threat to the region’s ecological balance.
• Sustainable model: A resilient tourism framework is necessary to protect Kashmir’s environment, support local communities, and ensure tourism’s economic benefits continue for future generations.