Fiscal Consolidation
Fiscal consolidation is a process where government’s fiscal health getting improved indicated by reduced fiscal deficit which is manageable and bearable for the economy. Improved tax revenue realization and better aligned expenditure are thus components of fiscal consolidation.
In India, fiscal deficit is the king indicator to show the fiscal health of the government. Effectively, fiscal deficit indicate the amount of government borrowing for that particular year.
Excess fiscal deficit produces some adverse effects, which were discussed previously.
Fiscal consolidation in India
In India, fiscal consolidation or the fiscal roadmap for the centre is expressed in terms of the budgetary targets (fiscal deficit and revenue deficit) to be realized in successive budgets. The Fiscal Responsibility and Budget Management (FRBM) Act gives the targets for fiscal consolidation in India. According to FRBM, the government should eliminate revenue deficit and reduce fiscal deficit to 3% (medium term) of the GDP. Following measures from the expenditure side and revenue side are envisaged by the government to achieve fiscal consolidation.
Higher economic growth rate will help government to get higher tax revenues as well. Augmentation of tax revenue is necessary to bring fiscal consolidation as there are limitations for reducing government expenditure in India.
(Read about the salient features of latest Finance commission recommendations along with this.)