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Subject: “Budget, Fiscal Policy”

  • Centre’s fiscal outlook faces geopolitical, revenue risks

    Question (2025, GS2): “Examine the evolving pattern of Centre-State financial relations in the context of planned development in India. How far have the recent reforms impacted the fiscal federalism in India?”
    Linkage: The Centre’s reliance on new cesses and duties to meet its budget goals, rather than expanding the core tax base itself, directly impacts fiscal federalism. Cesses and surcharges do not go into the divisible pool shared with states, altering Centre-State financial dynamics.

    Mentor comment

    Controller General of Accounts data show the Centre’s gross tax revenues growing only 3.7% in the first quarter of 2026-27, with Goods and Services Tax collections contracting and Union excise duties falling more than a fifth. The fiscal arithmetic is being held near its budgeted position by a larger nominal Gross Domestic Product denominator, by non-tax receipts led by the Reserve Bank of India dividend, and by new cesses and duties, rather than by the tax base itself.

    What is the divisible pool of central taxes?

    1. About: The divisible pool is that part of the Centre’s gross tax revenue which is shared with the States, arrived at after deducting collection costs, cesses and surcharges.
    2. The States’ share: The Sixteenth Finance Commission retained the share of States in the divisible pool of central taxes at 41%.
    3. From gross to net: The Centre’s net tax revenue is what remains after devolution, and a factor of 65% of gross tax revenue reflects the ratio of net to gross tax revenues in 2025-26 and in the 2026-27 Budget Estimates.
    4. Why cesses matter to it: A cess levied for a specified purpose sits outside the divisible pool, so the same rupee raised through a cess rather than a tax does not reach the States as devolution.

    What is tax buoyancy?

    1. About: Tax buoyancy measures how far tax revenue grows for each unit of growth in nominal Gross Domestic Product, capturing both the natural response of the tax base and the effect of policy changes.
    2. What zero buoyancy means: Personal income tax revenue growth in 2025-26 was only 0.037%, which implies a buoyancy of zero, so the tax raised nothing extra despite the economy expanding.

    What is the Implicit Price Deflator?

    1. About: The Implicit Price Deflator is the ratio of nominal to real Gross Domestic Product, and it captures the average price change across everything the economy produces rather than a fixed consumption basket.
    2. How it is used here: An Implicit Price Deflator based inflation of 5% to 5.5% is what converts an expected real growth of about 7% into nominal Gross Domestic Product growth of 12.5% to 13% in 2026-27.

    What is a cess?

    1. About: A cess is a levy imposed for a specified purpose, collected over and above the base tax, and its proceeds are meant to be applied only to that stated purpose.
    2. Its fiscal effect: Cess proceeds are not shareable with the States, so a shift from taxes to cesses reduces the shareable pool while leaving gross collections unchanged.

    Why did the Centre’s gross tax revenues grow only 3.7%?

    1. Two large taxes were rationalised: Personal income tax and Goods and Services Tax were both subjected to substantive modifications in 2025-26, with extensive rate rationalisation in both cases and a substantive rate reduction in the case of the Goods and Services Tax.
    2. The stated expectation: Those reforms were expected to entail an initial revenue sacrifice, with subsequent expansion of the tax base offsetting the loss over time.
    3. The carry-forward into this year: Personal income tax showed growth of 6.8% in the first quarter of 2026-27, and Goods and Services Tax revenues contracted 11%.
    4. The 2025-26 baseline: Goods and Services Tax revenue growth for the second half of 2025-26 was 4.67%, and personal income tax growth over the same year was effectively nil.
    5. The excise duty cut: As retail fuel prices rose on the West Asian crisis, the government reduced excise duties to ease the burden on consumers, and revenue from Union excise duties contracted 22.4% in the first quarter of 2026-27.

    What three remedial measures has the government taken?

    1. A new cess replacing a discontinued one: A Health Security and National Security Cess was introduced with effect from 1 February 2026, even as the Goods and Services Tax Compensation Cess was discontinued.
    2. A higher windfall tax on fuel exports: The windfall tax on exports of diesel, petrol and aviation turbine fuel was increased with effect from 3 August 2026.
    3. Higher import duties on precious metals: Import duty rates were raised on gold and silver bullion and on other specific precious metal articles, sweepings and clad metals.

    How does a higher nominal GDP change the fiscal picture?

    1. The budgeted assumption is being exceeded: The Budget assumed nominal Gross Domestic Product growth of 10.04%, well short of the growth now expected for the year.
    2. The consistency check: That deflator range is consistent with Consumer Price Index inflation at 3.9% and Wholesale Price Index inflation at 9.3% in the first quarter of 2026-27.
    3. The level, not the growth rate, is lower: On the 2022-23 base series, nominal Gross Domestic Product is estimated at Rs 391 lakh crore, below the budgeted level of Rs 393 lakh crore.
    4. The net effect on revenue: Taken together, estimated gross tax revenue would be realised or fall short by a small margin.

    What has happened to transfers to the States?

    1. A sharp contraction in the first quarter: Tax devolution to the States contracted 19.5% in the first quarter of 2026-27, with an expectation of higher assignment of central tax revenues in subsequent months.
    2. The shareable pool narrows at the margin: The introduction of the non-shareable Health Security and National Security Cess produces a marginal reduction in the shareable pool, though some part of its revenues may reach the States as grants outside the Finance Commission route.
    3. Finance Commission grants are budgeted lower: Based on the Sixteenth Finance Commission’s recommendation, Finance Commission grants for the States are budgeted to contract by Rs 23,556 crore in 2026-27.
    4. The devolution share itself is unchanged: The contraction is in the amounts flowing, not in the entitlement, since the States’ share in the divisible pool stays at 41%.

    What is holding the revenue account together?

    1. The central bank dividend: The Reserve Bank of India transferred dividends to the Centre in May 2026, so 77% of the budgeted dividends and profits for the full year were already covered in the first three months.
    2. Weight of non-tax revenue: The Centre’s non-tax revenues contributed 37% of its net revenue receipts in the first quarter of 2026-27.
    3. Other receipts on track: The budgeted amounts for non-tax and non-debt capital receipts are expected to be realised.
    4. Subsidy pressure on the other side: Major subsidies had to be increased 37.4% in the quarter because of the unexpected rise in global crude oil prices.
    5. Revenue expenditure held down: Growth in revenue expenditure was contained at 7.4% over the same quarter.
    6. Capital expenditure front-loaded: Capital expenditure grew 23.7% in the first quarter of 2026-27, against a contraction of 23.3% in the fourth quarter of 2025-26.
    7. The full-year subsidy overshoot: Extrapolating first-quarter subsidies to the year, realised subsidies are expected to exceed the budgeted amount by about Rs 50,000 crore.

    Where do the deficit numbers stand, and what could push them off track?

    1. First-quarter deficit position: The fiscal deficit accounted for 18.2% of the annual budgeted magnitude in the first quarter, and the corresponding share of the revenue deficit was 0.4%.
    2. Why the revenue account looks strong: The revenue account balance is held up mainly by the contribution of non-debt receipts, not by tax collections.
    3. The full-year estimates: Fiscal deficit calculated as the increment in debt is estimated at Rs 18.16 lakh crore, giving a fiscal deficit-to-Gross Domestic Product ratio of 4.6% on the new series, with the debt-to-Gross Domestic Product ratio at 55.8%.
    4. Three named slippage risks: A shortfall in tax revenues, an unbudgeted increase in revenue expenditure arising from additional subsidies, and a slightly higher external debt amid sustained pressure on the Indian rupee.
    5. The overriding risk: An escalation of the war in West Asia would deliver a major jolt to the economy and to central finances.
    6. The unwound measure: The reduction in excise duty on fuel must be restored at some suitable time, since it is a temporary relief carried at a permanent revenue cost.

    What challenges does the Centre’s fiscal consolidation path face?

    1. Rate rationalisation without base expansion: A tax cut delivers the revenue sacrifice immediately and the base expansion only over an uncertain horizon. Eg. Personal income tax delivered a buoyancy of zero in 2025-26, the year its rationalisation took effect.
    2. Subsidy exposure to imported energy prices: Subsidy outgo is set by global crude prices rather than by a domestic policy decision. Eg. Major subsidies rose 37.4% in the first quarter of 2026-27, putting the full year on course to overshoot its budgeted provision.
    3. Reliance on a single large non-tax transfer: A dividend from the central bank is a discretionary, year-specific receipt that cannot be assumed to repeat. Eg. 77% of the full year’s budgeted dividends and profits were covered in the first three months of 2026-27.
    4. Revenue relief that is politically hard to withdraw: An excise duty cut given when fuel prices rise is difficult to reverse when they fall. Eg. Union excise duties contracted 22.4% in the first quarter of 2026-27 following the cut.
    5. Deficit ratios improved by a denominator effect: A higher nominal Gross Domestic Product lowers the deficit ratio without any change in borrowing. Eg. Nominal growth running ahead of the budgeted 10.04% flatters the 4.6% fiscal deficit ratio.
    6. Interest burden crowding out capital spending: A debt-to-Gross Domestic Product ratio near 56% commits a large share of revenue receipts to interest before any programme is funded. Eg. Capital expenditure was front-loaded 23.7% in the first quarter after contracting 23.3% in the preceding quarter, a pattern that shifts rather than raises the annual total.
    7. Exchange rate pressure raising external liabilities: A weaker rupee raises the rupee cost of external debt service without any new borrowing. Eg. Sustained pressure on the rupee is named as one of the three sources of possible slippage from budgeted outcomes.

    Conclusion

    The Centre’s 2026-27 outcomes are likely to stay close to budgeted levels, and the reasons are a larger nominal Gross Domestic Product, front-loaded non-tax receipts and three new revenue measures, not a tax base that is delivering. Gross tax revenue growing at barely a third of the pace of nominal output is the number that has to change, since the rate rationalisations of 2025-26 were justified on the promise of base expansion that has not yet appeared. The immediate unresolved decisions are when the excise duty cut on fuel is restored and how far an escalation in West Asia pushes subsidies beyond the overshoot already projected.

    What is Fiscal Federalism?

    1. About: Fiscal federalism is the division of taxation powers, expenditure responsibilities and transfer arrangements between the Union and the States in a federal system.
    2. Rationale: Revenue-raising powers concentrate at the Centre because major tax bases are mobile, while expenditure responsibilities concentrate at the States because services are delivered locally. Transfers exist to close that gap.
    3. Vertical fiscal imbalance: The mismatch between the Union’s revenue capacity and the States’ expenditure responsibilities, addressed through devolution of a share of central taxes.
    4. Horizontal fiscal imbalance: The mismatch across States in revenue capacity and expenditure need, addressed through the Finance Commission’s distribution formula among States.
    5. Third tier imbalance: The mismatch between the functions devolved to panchayats and municipalities and the revenue sources available to them, addressed through State Finance Commissions and grants.
    6. The transfer instruments: Tax devolution from the divisible pool, Finance Commission grants, and centrally sponsored schemes with a matching State contribution.

    Key Concerns Regarding Fiscal Federalism

    1. Shrinking divisible pool through cesses and surcharges: Levies outside the divisible pool raise Union revenue without expanding what is shared, so the effective transfer falls below the headline share.
    2. Erosion of State taxation autonomy under the Goods and Services Tax: States surrendered independent rate-setting on most indirect taxes, and rate decisions now require a collective decision in a council.
    3. Weak third tier finances: Local bodies depend on transfers rather than own revenue, and State Finance Commissions are constituted irregularly in several States.
    4. Contested horizontal distribution criteria: Weighting population, income distance and demographic performance sets States that have controlled population growth against those with larger populations.
    5. Conditionality attached to central transfers: Centrally sponsored schemes tie State spending to Union priorities, reducing the discretion that devolution is meant to confer.
    6. Off-budget and contingent liabilities: Borrowing routed through State-owned entities and guarantees sits outside the headline deficit at both levels, obscuring the true fiscal position.

    Constitutional Framework Governing Union Finances

    1. Article 265: No tax shall be levied or collected except by authority of law.
    2. Article 266: Establishes the Consolidated Fund and the Public Account of India and of each State.
    3. Article 267: Provides for the Contingency Fund of India, placed at the disposal of the President for unforeseen expenditure.
    4. Article 112: Requires the annual financial statement of estimated receipts and expenditure to be laid before Parliament.
    5. Article 246 and the Seventh Schedule: Distribute legislative and taxation powers between the Union and the States through the Union, State and Concurrent Lists.
    6. Article 246A: Confers concurrent power on Parliament and State legislatures to make laws on the Goods and Services Tax.
    7. Article 269A: Provides for the levy and collection of the Goods and Services Tax on inter-State supply and its apportionment between the Union and the States.
    8. Article 270: Provides for the distribution of taxes levied and collected by the Union between the Union and the States, and excludes cesses and surcharges from that distribution.
    9. Article 271: Empowers Parliament to levy a surcharge on specified taxes for the purposes of the Union, the proceeds of which accrue wholly to the Union.
    10. Article 275: Provides for grants-in-aid from the Union to States in need of assistance.
    11. Article 279A: Provides for the constitution of the Goods and Services Tax Council.
    12. Article 280: Provides for the constitution of a Finance Commission every fifth year to recommend the distribution of taxes and the principles governing grants-in-aid.
    13. Article 282: Permits the Union or a State to make any grant for any public purpose, the provision under which centrally sponsored schemes are funded.
    14. Article 292 and Article 293: Govern borrowing by the Union and by the States, with State borrowing subject to Union consent where the State is indebted to the Union.
    15. Article 360: Provides for a proclamation of financial emergency.

    Laws Governing Government Budgeting in India

    1. Fiscal Responsibility and Budget Management Act, 2003: Requires the Centre to limit the fiscal deficit and to lay medium-term fiscal policy statements before Parliament.
    2. Amended in 2018 to shift the primary anchor from the revenue deficit to a debt-to-Gross Domestic Product target, with an escape clause for specified circumstances.
    3. Fiscal Responsibility and Budget Management Rules, 2004: Prescribe the form of the disclosure statements and the quarterly review requirement.
    4. Comptroller and Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971: Provides the basis for audit of Union and State accounts and for the reports laid before the legislatures.
    5. State fiscal responsibility legislation: Every State has enacted its own fiscal responsibility law setting deficit and debt limits, complementing the Union statute.
    6. Appropriation and Finance Acts: The Appropriation Act authorises withdrawal from the Consolidated Fund, and the Finance Act gives effect to the taxation proposals for the year.

    Government Initiatives in Public Financial Management

    1. Public Financial Management System: An end-to-end platform tracking fund release and utilisation from the Union to the last implementing agency, reducing float in the system.
    2. Direct Benefit Transfer: Routes subsidy and benefit payments to bank accounts directly, cutting duplication and leakage in the transfer chain.
    3. Single Nodal Agency mechanism: Requires each centrally sponsored scheme in a State to operate through one designated account, so unspent balances are visible.
    4. Special Assistance to States for Capital Investment: Provides fifty-year interest free loans to States tied to capital expenditure and to specified reforms.
    5. National Monetisation Pipeline: Raises resources by leasing operating public assets while retaining ownership, supplementing tax revenue for capital spending.
    6. Goods and Services Tax Network: The common technology platform for registration, return filing and invoice matching that generates the data underlying indirect tax collections.

    Back2Basics: Sixteenth Finance Commission

    1. What it is: A constitutional body constituted under Article 280 to recommend the distribution of net tax proceeds between the Union and the States, the allocation among States, and the principles governing grants-in-aid.
    2. Constitution: Constituted in December 2023, chaired by a former Vice Chairman of NITI Aayog.
    3. Award period: Its recommendations cover the five years beginning 2026-27.
    4. Advisory Council: The Commission is assisted by an Advisory Council of economists and public finance specialists.
    5. Status of recommendations: Its report is laid before Parliament along with an explanatory memorandum on the action taken, and the recommendations are advisory rather than binding.
    6. Additional terms of reference: Beyond devolution, the Commission examines disaster management financing and the review of State fiscal positions.

    Challenges in India’s Public Finances

    1. A low tax-to-Gross Domestic Product ratio: India’s combined tax collection relative to output remains below that of comparable middle-income economies, which caps what can be spent without borrowing. Eg. Gross tax revenue in the first quarter of 2026-27 grew at less than a third of the nominal output growth expected for the year.
    2. Narrow direct tax base: A small share of the population files and pays income tax, so any rate change transmits through a thin base. Eg. Personal income tax raised no more in 2025-26 than in the year before, despite nominal output expanding through that year.
    3. Rigidity of committed expenditure: Interest, salaries, pensions and statutory transfers consume most revenue receipts before discretionary spending begins. Eg. The debt-to-Gross Domestic Product ratio is estimated at 55.8% for 2026-27.
    4. Exposure to imported commodity prices: Fuel and fertiliser subsidies move with global prices rather than with domestic policy. Eg. Major subsidies rose 37.4% in the first quarter of 2026-27 on the unexpected rise in global crude oil prices.
    5. Volatility of non-tax receipts: Dividends, disinvestment proceeds and spectrum receipts are lumpy and cannot be relied on across years. Eg. Non-tax revenues contributed 37% of net revenue receipts in the first quarter of 2026-27.
    6. State-level fiscal stress and guarantees: Contingent liabilities from State-owned distribution companies and guaranteed borrowings sit outside headline deficits. Eg. Tax devolution to the States contracted 19.5% in the first quarter, tightening State cash positions in the same period.
    7. Weak link between capital spending and outcomes: Front-loading capital expenditure raises the quarterly number without ensuring project completion. Eg. Capital expenditure grew 23.7% in the first quarter of 2026-27 after contracting 23.3% in the preceding quarter.

    Way Forward

    1. Restore the excise duty on fuel on a stated schedule: Announcing the timing in advance converts a politically difficult reversal into a pre-committed step, as the analysis itself recommends.
    2. Publish base expansion metrics alongside rate rationalisation: Reporting the change in the number of filers and in registered taxpayers would test the premise on which the 2025-26 rationalisation was justified.
    3. Cap the share of revenue raised through cesses and surcharges: A ceiling would stop the divisible pool narrowing through instruments that bypass Article 270.
    4. Insulate subsidy budgeting from a single price assumption: Building a price band and a contingency provision into the subsidy estimate would prevent an overshoot of this size appearing mid-year.
    5. Treat central bank dividends as a windfall, not a base receipt: Directing above-trend transfers to debt reduction rather than to recurring expenditure would stop a one-off receipt becoming a structural assumption.
    6. Smooth capital expenditure across quarters: Front-loading followed by contraction disrupts contractor payment cycles and project execution, so a steady release profile serves outcomes better than a strong first quarter.
    7. Bring off-budget and guaranteed borrowing into the disclosure statements: Consolidated reporting at both Union and State levels is the precondition for the debt path to mean what it states.

    “[2019, GS3, 10] The public expenditure management is a challenge to the Government of India in context of budget making during the post liberalization period. Clarify it.”

  • Why corporate investment has not revived despite tax cuts and cheap credit

    Source: The Hindu, Page 10, Text & Context
    Published: 19 August 2026

    Why in the News

    Corporate investment as a share of Gross Domestic Product (GDP) has fallen to about 9 percent from a peak of 17.3 percent, and has not returned even to the low levels recorded during the Global Financial Crisis. A corporate tax cut from 30 percent to 22 percent and a sustained low interest rate regime failed to reverse the decline, which points to a constraint that cost side policy does not touch.

    What does corporate investment as a share of GDP measure?

    1. Definition: It measures the value of new fixed assets created by companies, such as plant, machinery and buildings, expressed as a proportion of the economy’s total output.
    2. Why the ratio is used: Expressing investment as a share of output strips out inflation and growth in the size of the economy, so a fall in the ratio means investment is growing slower than output.
    3. What it signals: Corporate investment builds the future productive capacity of the economy, so a sustained decline in the ratio caps the growth rate the economy can sustain later.
    4. Data source used here: The trend is drawn from the Database on Indian Economy maintained by the Reserve Bank of India (RBI).

    What are animal spirits?

    1. Definition: Animal spirits, a term used by John Maynard Keynes, refers to the level of confidence with which firms hold their expectations about future profits.
    2. How it acts: High confidence pushes the expected profitability schedule outward and raises investment at every level of cost, and pessimism about the future pulls it inward.

    What is the principle of increasing risk?

    1. Definition: The principle of increasing risk, proposed by Michal Kalecki, holds that the cost of borrowing rises as a firm takes on more loans in proportion to its own funds committed to a project.
    2. Its consequence: The system is rigged against small capitalists even where small and large firms hold the same blueprint of a technology, because access to capital begets more capital.

    What is the Prowess database?

    1. Definition: Prowess is a firm level database of Indian companies compiled from their audited annual accounts, used for panel studies of corporate performance.
    2. Use in this analysis: The study draws a balanced panel of listed manufacturing firms from Prowess to compare profitability and interest costs across firm sizes.

    What is autonomous expenditure?

    1. Definition: Autonomous expenditure is spending that does not depend on the current level of income or profit in the economy, so it can rise when private demand is falling.
    2. Why it matters here: Government expenditure is the principal autonomous component, which is why it can create demand actively rather than merely responding to demand that already exists.

    How has corporate investment moved since 2000?

    1. The take off: Corporate investment took off in 2004, jumping almost four percentage points from 6.5 percent to 10.3 percent of GDP.
    2. The peak: It rose further during the growth years to a peak of 17.3 percent.
    3. The crisis fall: It fell during the Global Financial Crisis, then began a steady revival.
    4. The break point: The revival ran until demonetisation hit the economy in 2016, after which the decline has been continuous.
    5. Where it stands: The share is now about 9 percent, and has not returned even to the low levels recorded during the Global Financial Crisis.

    Why is demonetisation treated differently from the other shocks?

    1. Nature of the shock: The global economic crisis was an external shock beyond India’s control, and demonetisation was a self inflicted shock.
    2. Depth of the fall: The post 2016 decline has taken the share below the crisis era floor, which the external shock itself never did.
    3. Covid is not the explanation: Covid arrived in 2020-21 as another external shock, and the decline in investment had started a few years earlier.
    4. Two channels of damage: Demonetisation pushed the expected profitability schedule inward both because immediate profitability declined and because the credibility of future policy steps became suspect.
    5. The casualty at the margin: The fall was severe enough to push small firms below the cost of credit curve altogether, forcing many out of business, which is what happened to many micro, small and medium enterprises (MSMEs) in this period.

    What three factors determine a firm’s investment decision?

    1. Expected profitability: The profit a firm expects from selling the goods the new factory will produce, assessed over the whole life of the asset.
    2. Confidence in that expectation: The certainty with which the firm can predict those profit rates over the factory’s lifetime, which sets the position of the profitability schedule.
    3. Cost of credit: The price of borrowing, which matters once the planned investment exceeds the firm’s own available funds.
    4. How profitability varies with size: Most industries have economies of scale, so larger equipment, factories and workspaces carry higher profit rates than smaller ones, and expected profitability rises with the size of the investment.
    5. Where that stops: Each firm has an upper limit to how much it can sell, set by its share in the total market, and investment beyond that point leaves part of the factory idle.
    6. Two channels for the interest rate: A firm that does not build can park its funds in an interest bearing asset, so expected profitability must exceed the market interest rate, and a firm that borrows faces a cost of credit that is flat up to its own capital and rises steadily thereafter.

    Why does firm size change what constrains investment?

    1. Small firms: With very low levels of own capital the cost of credit curve starts rising far sooner, and it cuts the upper portion of the profitability curve.
    2. Their binding constraint: Investment by such firms is constrained by the availability of credit, and their interest costs are correspondingly high.
    3. Large firms: Their own capital is high enough that the cost curve cuts the profitability curve on its vertical portion.
    4. Their binding constraint: Such firms are limited by the market rather than by finance, and interest costs are not consequential for them.
    5. The structural implication: The same technology blueprint yields different investment outcomes purely because of the firm’s existing access to capital.

    What does the firm level data show?

    1. The sample: A balanced panel of 1,224 listed manufacturing firms between 2000 and 2024, drawn from the Prowess dataset and grouped into three sizes.
    2. Size definition: Median capital stock is Rs 14.5 crore for small firms, Rs 156.8 crore for medium firms and Rs 1,745.9 crore for large firms, all measured in 2011-12 prices.
    3. The profitability gradient: Smaller firms have lower profitability than larger firms, with the median rate of profit rising across the three size classes.
    4. The interest cost gradient: Smaller firms carry higher interest costs than larger firms, with median interest costs falling as size rises.
    5. What it confirms: The asymmetry predicted by the theory, that small firms are credit constrained and large firms are demand constrained, holds by and large for the Indian manufacturing sector.

    Why did a tax cut and cheap credit fail to revive investment?

    1. The tax cut: The corporate tax rate was cut from 30 percent to 22 percent, alongside a low interest rate regime followed by the Reserve Bank of India.
    2. No effect on small firms: A fall in the interest rate does not revive investment among smaller firms once their expected profitability has collapsed below the cost of credit.
    3. No effect on large firms: A large firm is not constrained by credit in the first place, so cheaper credit has no impact on its investment decision.
    4. The general result: Cost side policy interventions, including tax cuts, do not have much expansionary impact on investment, because neither group’s binding constraint is the cost of funds.
    5. What the failure reveals: Both groups are ultimately held back by expected demand, and cheapening the supply of capital does nothing to create that demand.

    What would shift expected profitability outward?

    1. The required direction: What is needed is to push the profitability curve outward, which raises investment by both small and large firms simultaneously.
    2. The only instrument that does it: This can be achieved only if government expenditure acts as an autonomous stimulus.
    3. The mechanism: Such expenditure creates demand actively, and rising demand pushes the profitability curves outward for firms of every size.
    4. The fiscal implication: It requires giving up on being a fiscal hawk, since the stimulus has to be sustained rather than symbolic.
    5. The political signal being read: The same conclusion is drawn from the youth protesting on the streets asking for gainful employment.

    Challenges to reviving corporate investment in India

    1. Weak capacity utilisation: Firms do not add capacity while existing plants run below their rated output. e.g. manufacturing capacity utilisation tracked by the Reserve Bank of India has hovered around the mid seventies in percentage terms for extended periods.
    2. Credit constraint on small firms: Formal lenders price small borrowers out or lend against collateral they lack. e.g. the credit gap for micro, small and medium enterprises runs into lakhs of crores against their assessed requirement.
    3. Policy uncertainty: Abrupt changes damage the confidence component of investment decisions independently of the direct cost. e.g. the retrospective amendment to tax cross border share transfers after the Vodafone ruling deterred investors until it was withdrawn in 2021.
    4. Weak household demand: Consumption growth caps the sales any firm can plan for. e.g. the collapse in employment generation under the rural employment guarantee programme in April to July 2026 cut rural purchasing power directly.
    5. Land and clearance delays: Project timelines stretch well beyond the investment appraisal horizon. e.g. large steel and refinery projects in Odisha and Maharashtra have taken over a decade from announcement to commissioning.
    6. Legacy stressed assets: Bank and corporate balance sheets recovering from earlier defaults limit fresh risk appetite. e.g. the twin balance sheet problem of the mid 2010s suppressed both credit supply and corporate borrowing for years.
    7. Import competition in inputs: Cheaper imported inputs and finished goods reduce the return on domestic capacity creation. e.g. domestic solar module manufacturers competed against imported cells until duties and incentives were introduced.

    Conclusion

    Corporate investment has fallen to about 9 percent of GDP from a peak of 17.3 percent and remains below its Global Financial Crisis floor, with the decline dating from 2016 rather than from Covid. A corporate tax cut from 30 percent to 22 percent and a low interest rate regime failed because neither addresses the binding constraint, since small firms are held back by credit access and large firms by the size of the market. Pushing expected profitability outward requires government expenditure acting as an autonomous stimulus, which means abandoning fiscal hawkishness rather than repeating cost side concessions.

    Foundational Context: What is Capital Formation?

    1. About: Capital formation is the addition to the stock of physical assets in an economy in a given period, measured in the national accounts as Gross Fixed Capital Formation (GFCF).
    2. Rationale: It exists as a distinct measure because current output can either be consumed or used to create productive capacity, and only the second raises future output.
    3. Named typology, by the investing sector:
    4. Public sector capital formation: Investment by the Central and State governments and by public sector enterprises, largely in infrastructure.
    5. Private corporate sector capital formation: Investment by registered companies in plant, machinery and structures, which is the measure this item tracks.
    6. Household sector capital formation: Investment by households and unincorporated enterprises, dominated by residential construction.
    7. Related measure: The investment rate is Gross Fixed Capital Formation expressed as a share of Gross Domestic Product, and the incremental capital output ratio measures how much investment is needed to produce one additional unit of output.

    Key Concerns Regarding Capital Formation in India

    1. Private investment has not replaced public investment: Central capital expenditure has risen sharply while private corporate investment has stagnated, so the recovery rests on one leg.
    2. Household investment is concentrated in real estate: A large share of household capital formation is residential construction, which adds less to productive capacity than plant and equipment.
    3. Financing depth for small firms: The corporate bond market is accessible only to highly rated large issuers, leaving small firms dependent on bank credit at high spreads.
    4. Crowding out concern: Sustained government borrowing to fund the stimulus can raise interest rates and reduce private investment, which is the standard counter argument to an expenditure led revival.
    5. Measurement lag: Private corporate investment is estimated with a significant lag and revised substantially, which delays the recognition of a turning point in the cycle.

    Statutory Framework Governing Fiscal Policy and Public Investment

    1. Article 112: Requires the Annual Financial Statement of estimated receipts and expenditure to be laid before Parliament for every financial year.
    2. Article 266: Establishes the Consolidated Fund of India and the Public Account, from which expenditure may be made only under authority of law.
    3. Article 292: Empowers the Union to borrow upon the security of the Consolidated Fund of India within limits fixed by Parliament.
    4. Article 293: Governs State borrowing and requires the consent of the Union where a State is indebted to it.
    5. Article 280: Provides for the Finance Commission, whose recommendations determine the vertical and horizontal sharing of Union taxes.
    6. Fiscal Responsibility and Budget Management Act, 2003: Sets statutory fiscal targets and requires the government to lay fiscal policy statements before Parliament.
    7. Section 4: Prescribes the fiscal deficit and debt targets and the grounds on which they may be deviated from.
    8. Section 7: Requires the Finance Minister to review and report on the trends in receipts and expenditure to Parliament.

    Laws and Rules Governing Corporate Finance and Small Firm Credit

    1. Companies Act, 2013: Governs incorporation, capital raising, disclosure and audit obligations of companies, which is the source of the accounts used in firm level databases.
    2. Micro, Small and Medium Enterprises Development Act, 2006: Defines the three enterprise categories and provides for delayed payment remedies for small suppliers.
    3. Section 15 and Section 16: Require payment to a micro or small enterprise within a specified period and provide for compound interest on delay.
    4. Insolvency and Bankruptcy Code, 2016: Provides a time bound resolution process for corporate debtors, which determines how quickly stressed capital is redeployed.
    5. Factoring Regulation Act, 2011, amended in 2021: Widened the set of lenders permitted to undertake factoring, easing receivables financing for small firms.
    6. Reserve Bank of India Act, 1934: Provides the statutory basis for monetary policy, including the inflation targeting framework that governs the interest rate regime.
    7. Fiscal Responsibility and Budget Management Rules, 2004: Prescribe the formats and the quarterly review obligations under the parent Act.

    Back2Basics: Demonetisation of 2016

    1. What it was: The withdrawal of legal tender status from the existing Rs 500 and Rs 1,000 currency notes, announced on 8 November 2016.
    2. Legal basis: Effected through a notification under Section 26(2) of the Reserve Bank of India Act, 1934, on the recommendation of the Central Board of the Reserve Bank of India.
    3. Stated objectives: Curbing unaccounted money, countering counterfeit currency and terror financing, and accelerating the shift to digital payments.
    4. Replacement currency: New Rs 500 and Rs 2,000 notes were introduced, and the Rs 2,000 note was later withdrawn from circulation in 2023.
    5. Return of notes: The Reserve Bank of India subsequently reported that the overwhelming majority of the demonetised currency was returned to the banking system.
    6. Judicial position: A Constitution Bench of the Supreme Court upheld the decision by a 4 to 1 majority in January 2023, holding that the process followed did not suffer from a legal infirmity.
    7. Economic effect recorded here: It marks the point after which corporate investment as a share of Gross Domestic Product began a continuous decline, and it pushed many micro, small and medium enterprises out of business.

    Government Initiatives

    1. Production Linked Incentive schemes: Pay incentives on incremental sales of goods manufactured in India across sectors including electronics, pharmaceuticals and automobiles, aimed at drawing private capital into manufacturing capacity.
    2. National Infrastructure Pipeline and the National Monetisation Pipeline: Set out a project pipeline for public infrastructure investment and a route to recycle operating public assets into fresh capital expenditure.
    3. PM Gati Shakti National Master Plan: Coordinates infrastructure planning across ministries to reduce logistics cost and project delay, both of which enter the investment appraisal of private firms.
    4. Emergency Credit Line Guarantee Scheme: Provided fully guaranteed collateral free credit to micro, small and medium enterprises to keep credit constrained firms solvent.
    5. Credit Guarantee Fund Trust for Micro and Small Enterprises: Guarantees collateral free bank lending to small firms, addressing the security requirement that keeps them off formal credit.
    6. Trade Receivables Discounting System (TReDS): An electronic platform allowing small suppliers to discount invoices owed by large buyers, easing the working capital squeeze.
    7. Corporate tax rate reduction: The concessional rate regime introduced for domestic companies, and a lower concessional rate for new manufacturing companies, intended to raise post tax returns on new capacity.

    Key Facts about Investment in the Indian Economy

    1. Peak investment rate: India’s overall gross fixed capital formation rate peaked in the years before the Global Financial Crisis, in step with the corporate investment peak of 17.3 percent recorded here.
    2. Corporate tax rates: The headline domestic corporate tax rate was reduced from 30 percent to 22 percent, with a lower concessional rate offered to new manufacturing companies.
    3. Monetary framework: India adopted flexible inflation targeting in 2016, with the target set at 4 percent and a tolerance band of plus or minus 2 percentage points.
    4. Micro, small and medium enterprises: The sector accounts for roughly 30 percent of Gross Domestic Product and about 45 percent of exports.
    5. Crowding out effect: The proposition that government borrowing raises interest rates and thereby reduces private investment, which is the standard objection to an expenditure led revival.
    6. Data sources: The Database on Indian Economy of the Reserve Bank of India for macro aggregates, and firm level databases such as Prowess for company accounts.

    Challenges in Reviving the Investment Cycle

    1. Demand uncertainty: Firms will not commit to long lived assets without visibility on sales. e.g. consumer durables makers deferred capacity additions through successive years of weak rural demand.
    2. Fiscal space for the stimulus: A sustained expenditure push runs against the statutory deficit path. e.g. the Fiscal Responsibility and Budget Management Act, 2003 targets constrain the size of a discretionary stimulus.
    3. Transmission of rate cuts: Policy rate reductions reach small borrowers slowly and incompletely. e.g. lending rates for small firms have historically moved far less than the repo rate in the same period.
    4. Skill and labour mismatch: New capacity requires skilled workers who are not available at scale. e.g. semiconductor and electronics assembly investments have flagged shortages of trained technicians.
    5. Land acquisition cost and delay: Assembling contiguous land for large plants remains the slowest step. e.g. industrial projects across several States have stalled for years at the land acquisition stage.
    6. Global trade uncertainty: Export oriented capacity decisions are hostage to tariff shifts abroad. e.g. punitive tariffs of 50 percent on Indian goods disrupted the export calculus for entire product lines.
    7. Concentration of profitability: Profits accrue disproportionately to large firms, which are the very firms not constrained by finance. e.g. the firm level panel shows median profitability rising and interest costs falling as firm size increases.

    Way Forward

    1. Use expenditure as the lead instrument: Direct sustained public expenditure at demand creating heads so that expected profitability rises for firms of every size rather than only for the largest.
    2. Target employment intensive spending: Prioritise programmes that put income directly in the hands of households, since that is what converts stimulus into the sales firms plan around.
    3. Fix credit access rather than credit price: Expand guarantee backed and receivables based lending to small firms, whose constraint is availability rather than the interest rate.
    4. Restore policy predictability: Avoid abrupt, economy wide interventions, since the confidence component of the investment decision recovers far slower than the immediate profitability component.
    5. Complete the public capital expenditure pipeline: Convert announced infrastructure projects into commissioned assets on schedule, so that the demand impulse is actually delivered.
    6. Report investment data faster: Shorten the lag and revision cycle in private corporate investment estimates so that a turning point is identified in time to act on it.

    Matching Previous Year Question

    “[2026] Which one of the following best describes the ‘Crowding Out Effect’ in the context of fiscal policy?
    (a) A situation where private investment increases due to increased Government spending
    (b) A situation where Government borrowing leads to higher interest rates, which reduces private investment
    (c) A situation where an increase in taxes leads to increased private sector investment
    (d) A situation where Government spending has no impact on aggregate demand
    Answer: (b)”

  • Govt. brings scheme to disclose foreign assets

    Why in the News

    The Central Board of Direct Taxes notified the Foreign Assets of Small Taxpayers Disclosure Scheme (FAST-DS), open from 16 August to 31 December 2026. The scheme offers immunity from penalty and prosecution under the black money law in exchange for an effective 60 per cent levy. The tension is between clearing a large stock of inadvertent non disclosure by salaried professionals and the moral hazard of repeated amnesty windows.

    What is FAST-DS?

    1. About: FAST-DS is a time bound voluntary disclosure window for undisclosed foreign income and assets held by small taxpayers.
    2. Category one: Previously untaxed foreign assets or income with an aggregate value up to Rs 1 crore, charged at 30 per cent tax plus 30 per cent in lieu of penalty, an effective 60 per cent.
    3. Category two: Foreign assets up to Rs 5 crore that were already offered to tax, or acquired while the holder was non resident, but were not reported in the return schedule, settled through a flat fee of Rs 1 lakh.
    4. Valuation date: Fair market value is determined as of 31 March 2026.
    5. Relief granted: Immunity from penalty and prosecution under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
    6. Exclusion: Immunity does not extend to proceedings under the Prevention of Money Laundering Act, 2002.

    Who is the scheme actually aimed at?

    1. Target group: Students, young technology professionals and returning non resident Indians who hold foreign equity awards.
    2. Typical asset: Restricted stock units and employee stock options vested while working for a foreign parent company.
    3. Nature of default: The default is usually a failure to fill the foreign asset schedule of the return, not concealment of income.
    4. Penalty exposure avoided: The 2015 Act prescribes a flat penalty of Rs 10 lakh for non disclosure of a foreign asset regardless of the asset’s size.

    Why is the government able to detect these assets now?

    1. Common Reporting Standard: Participating jurisdictions automatically exchange financial account information on each other’s residents.
    2. Foreign Account Tax Compliance Act: The bilateral arrangement with the United States requires reporting of accounts held by Indian residents.
    3. Effect on enforcement: Automatic exchange converts detection from an investigative exercise into a data matching exercise.
    4. Consequence for taxpayers: Non disclosure that once went unnoticed now surfaces as a mismatch in the department’s records.

    What does the design tell us about the government’s calculation?

    1. Rate choice: An effective 60 per cent rate is punitive against the 30 per cent maximum marginal rate, so the scheme is not priced as a concession.
    2. Threshold choice: The Rs 1 crore and Rs 5 crore ceilings exclude large scale offshore holdings, keeping the window away from serious evaders.
    3. Money laundering carve out: Retaining Prevention of Money Laundering Act exposure signals that the scheme buys relief from reporting failure, not from criminal conduct.
    4. Duration: A four and a half month window forces disclosure decisions inside one assessment cycle.

    Challenges to voluntary disclosure schemes

    1. Moral hazard: Repeated windows teach compliant taxpayers that waiting is rewarded. e.g. the Income Declaration Scheme of 2016 following earlier voluntary disclosure rounds.
    2. Modest collections: Disclosure schemes typically raise far less than projected. e.g. the 2015 black money compliance window collecting about Rs 2,428 crore in tax and penalty.
    3. Valuation disputes: Fair market value of unlisted foreign equity is contestable and invites later litigation. e.g. disputes over the valuation of unlisted shares under earlier disclosure rounds.
    4. Equity objection: Constitutional challenges have been mounted arguing amnesty discriminates against honest taxpayers. e.g. the Supreme Court’s observations in the challenge to the 1997 Voluntary Disclosure of Income Scheme.
    5. Residual exposure: Immunity under one statute does not close exposure under others, which suppresses participation. e.g. the explicit exclusion of Prevention of Money Laundering Act proceedings in this scheme.
    6. Data mismatch errors: Automatic exchange data carries identity and currency conversion errors that generate wrongful notices. e.g. duplicate reporting of joint accounts under the Common Reporting Standard.

    Conclusion

    FAST-DS is priced and capped so that it functions as a clean up of reporting failure by salaried professionals rather than as an amnesty for offshore concealment. Retaining money laundering exposure is what keeps the scheme distinguishable from a general pardon. The next milestone is the disclosure volume reported when the window closes on 31 December 2026.

    Back2Basics: Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015

    1. Enacted in 2015 to deal specifically with undisclosed foreign income and assets, separately from the Income-tax Act.
    2. Levies a flat tax of 30 per cent on undisclosed foreign income and assets, with no deductions or exemptions permitted.
    3. Prescribes a penalty of three times the tax on undisclosed foreign assets, and a flat penalty of Rs 10 lakh for failure to disclose a foreign asset in the return.
    4. Provides for rigorous imprisonment of three to ten years for wilful attempt to evade tax on foreign income or assets.
    5. Applies to persons resident in India, and covers assets held as a beneficial owner or beneficiary.

    Way Forward

    1. Make the disclosure schedule simpler: Redesign the foreign asset schedule so vested equity awards can be reported without professional assistance.
    2. Pre fill from exchanged data: Populate the return with information already received under automatic exchange, converting disclosure into confirmation.
    3. Separate reporting failure from evasion: Set a lower statutory penalty for a first time reporting lapse below a defined threshold, so an amnesty window is not needed to fix it.
    4. Publish outcome data: Report collections and participant counts after closure, so the case for or against future windows rests on evidence.
    5. Close the window credibly: State that no further disclosure window will follow, since the deterrent value of the 2015 Act depends on that expectation.

    Matching Previous Year Question

    “[2021] Which one of the following effects of the creation of black money in India has been the main cause of worry to the Government of India? (a) Diversion of resources to the purchase of real estate and investment in luxury housing (b) Investment in unproductive activities and purchase of precious stones, jewelry, gold, etc. (c) Large donations to political parties and the growth of regionalism (d) Loss of revenue to the State Exchequer due to tax evasion Answer: (d)”

  • Why is the government offloading stake in LIC?

    Why in the News

    The Government of India has launched an Offer for Sale (OFS) to reduce its stake in the Life Insurance Corporation of India (LIC). The move aims to meet SEBI’s minimum public shareholding (MPS) requirement and contribute to the government’s FY27 disinvestment target.

    What is an Offer for Sale (OFS)?

    • Definition: An Offer for Sale (OFS) is a mechanism through which an existing shareholder (promoter) sells shares to the public through the stock exchange.
    • No Fresh Capital: The company does not receive any funds; the sale proceeds go to the selling shareholder.
    • Current Issue: The Government offered 2.5% equity, with a 4% green shoe option, at a floor price of Rs 382 per share.
    • Discount: The floor price represented about a 10% discount to LIC’s closing market price on 3 August.

    What is the Minimum Public Shareholding (MPS) norm?

    • Requirement: SEBI mandates that listed companies maintain a minimum level of public shareholding.
    • LIC Deadline: LIC has been given time until 16 May 2027 to achieve 10% public shareholding.
    • Purpose: The OFS helps LIC move towards compliance with this regulatory requirement.

    Why is the Government selling its stake now?

    • Regulatory Compliance: To meet SEBI’s public shareholding norms.
    • Disinvestment Target: The sale contributes towards the FY27 disinvestment target of Rs 80,000 crore.
    • Estimated Receipts: At the base price, the issue could raise around Rs 31,000 crore.
    • Strong Demand: The institutional investor portion was oversubscribed 3.32 times, leading to the exercise of the green shoe option.
    • Implementing Agency: The process is managed by the Department of Investment and Public Asset Management (DIPAM).

    What is LIC’s position in the insurance sector?

    • Market Leader: LIC accounted for over 56% of India’s life insurance market in FY26.
    • Systemically Important: LIC is designated as a Domestic Systemically Important Insurer (D-SII), subject to enhanced regulatory supervision.
    • Listing History: LIC’s 2022 IPO sold 3.5% government stake and raised Rs 20,557 crore.

    [2025] Consider the following statements:
    I. Capital receipts create a liability or cause a reduction in the assets of the Government.
    II. Borrowings and disinvestment are capital receipts.
    III. Interest received on loans creates a liability of the Government.
    Which of the statements given above are correct?
    (a) I and II only

    (b) II and III only

    (c) I and III only

    (d) I, II and III

  • Fiscal Health Index (FHI) 2026

    Why in News?

    NITI Aayog has released the second edition of the Fiscal Health Index (FHI) 2026, providing a comprehensive assessment of the fiscal performance of Indian States during FY 2023–24. The report expands its coverage to include 10 North-Eastern and Himalayan States, in addition to the 18 major States assessed in the inaugural edition.

    Key Highlights

    • Expanded coverage: Evaluates 28 States (18 major States + 10 North-Eastern and Himalayan States).
    • Purpose: Measures the fiscal health of States using a transparent and data-driven framework.
    • Fiscal significance: States account for nearly two-thirds of public expenditure and about one-third of the general government debt.
    • Key finding: Most States recorded moderate fiscal performance, with significant variations across regions.
    • Recommendations: Improve own tax revenue, rationalise committed expenditure, strengthen capital expenditure, enhance public financial management, and ensure debt sustainability.

    What is the Fiscal Health Index (FHI)?

    • The Fiscal Health Index (FHI) is an annual report released by NITI Aayog to evaluate the fiscal performance of States using objective indicators. It promotes fiscal discipline, financial sustainability, and evidence-based policymaking while encouraging States to improve public financial management.

    Key Parameters of the Fiscal Health Index

    • Quality of Expenditure
    • Revenue Mobilisation
    • Fiscal Prudence
    • Debt Management

    Significance of the Fiscal Health Index

    • Encourages competitive and cooperative federalism.
    • Helps identify strengths and weaknesses in State finances.
    • Supports informed policy decisions and fiscal reforms.
    • Promotes sustainable public finances and efficient resource allocation.
    • Enhances transparency and accountability in fiscal governance.

    Challenges Highlighted by the Report

    • Low own tax revenue in several States.
    • High committed expenditure on salaries, pensions, and interest payments.
    • Rising debt burden in some States.
    • Limited fiscal space for developmental expenditure.
    • Regional disparities in fiscal performance.

  • What were the reasons for the introduction of Fiscal Responsibility and Budget Management (FRBM) Act, 2003? Discuss critically its salient features and their effectiveness

  • What is the meaning of the term ‘tax expenditure’? Taking housing sector as an example, discuss how it influences the budgetary policies of the government.

  • One of the intended objectives of Union Budget 2017-18 is to ‘transform, energize and clean India’.Analyse the measures proposed in the Budget 2017-18 to achieve the objective.

  • Comment on the important changes introduced in respect of the Long term Capital Gains Tax (LCGT) and Dividend Distribution Tax (DDT) in the Union Budget for 2018-2019.

  • The public expenditure management is a challenge to the Government of India in context of budget making during the post liberalization period. Clarify it.

    Post-1991 liberalisation transformed India’s economy from a state-controlled to a more market-driven system. This expanded public spending needs while simultaneously demanding fiscal discipline.

    Need for Public Expenditure

    Provision of Public Goods – Eg- spending on health, education

    Social Welfare & Equity – Eg – Poshan 2.0, PM-Jan Arogya Yojana.

    Infrastructure Development – Eg – National Infrastructure Pipeline.

    Poverty Alleviation & Employment – Eg – MGNREGA wage payments.

    Reducing Regional Imbalances – Eg – Aspirational Districts Programme.

    Counter-cyclical spending during downturns. – Eg – Pandemic stimulus packages.

    Human Capital Development – Eg – PM Kaushal Vikas Yojana.

    Technological & R&D Support – Eg – Funding for ISRO, Digital India.

    Major challenges in Public Expenditure management

    Interest Payment obligations – The budgetary estimate for 2025-26 – Rs 12.76 lakh crore on interest payments forming 25 % of the government’s total expenditure.

    Low Tax Buoyancy: The tax-to-GDP ratio in India is around 10-12%, lower, while for OECD its 33%.

    Expanding Welfare Commitments – Growth in health, education, pensions, MGNREGA raises recurring liabilities.

    FRBM Constraints – FRBM mandates FD of 4.4% of GDP, limiting fiscal space.

    Poor Budgetary Forecasting : Budgets often overstate revenue projections (15 out of 20 years since fiscal 1998) and understate expenditures (12 out of 20 years since fiscal 1998).

    Fiscal Populism – eg loan waivers to farmers

    Rise in Off-Budget Expenditure – Eg: Food subsidy via FCI, UDAY bonds by states.

    Rise in Public Administration Costs – Eg: 8th Pay Commission can increase salary & pension burden.

    Need for Infrastructure Investment in transport, energy, and urbanisation, but fiscal space remained limited. Eg- As per WB, $2.2 trillion by 2030 is needed

    Public Sector Inefficiencies – Persistent losses in PSUs require budgetary support, reducing room for developmental expenditure.

    External Challenges

    Volatile Crude Oil Prices due to geopolitical instability. India imports 85% of its crude.

    Rising International Commitments under Paris Agreement, SDGs, Sendai Framework etc. Eg- Renewable energy targets.

    Rupee depreciation increases the cost of external debt servicing and capital imports.

    Rising Protectionism and Trade Wars have impacted exports. Eg- Trump H1B visa restrictions

    Increased Defence spending due to External Threat. Eg- 5% increase in defence spending in 2025 than 2024.

    Way Forward for Effective Fiscal Policy in India

    Establish an independent fiscal council to provide unbiased analysis of fiscal policy and enhance transparency and accountability. (15th FC Report)

    Scrutiny of Populist Policies and Outcome-Oriented Budgeting (NITI Aayog)

    Leveraging PPP for mobilizing private sector investment for infrastructure projects. (Economic Survey)

    Reforming Social Welfare Programs: Eg- Shanta Kumar Committee estimated that reforms in PDS could

    Cut down administrative costs by 10-15% through e-governance. (2nd ARC)

    Enhance Tax Buoyancy – to achieve a medium-term growth trajectory of 6.5-7.0% and realize Viksit Bharat vision, tax buoyancy needs to be in the 1.2-1.5 range. (EY Report)

    Improve Centre-State Fiscal Coordination – Encourage states through capex-linked incentives, as in Union Budget 2023-24’s 50-year interest-free loans.

    Strategic Disinvestment – Use proceeds to fund infrastructure, logistics, transport, not for recurring expenditure. (NITI Aayog)

    Efficient expenditure is critical for sustainable budgeting and Viksit Bharat 2047.