Fiscal Consolidation

We could define fiscal consolidation as a set of measures designed to reduce fiscal deficits and public debts. As High fiscal deficits and debt tend to heighten inflation, reduce room for monetary policy stimulus, increase the risk of external sector imbalances and dampen private investment, growth and employment. This invariably weakens the currency and negatively impacts the capital markets and the banking sector. The growing fiscal deficit also leaves limited monetary space for lowering interest rates to stimulate private investment and growth.

 Fiscal Consolidation includes efforts to raise revenues and bring down wasteful expenditure such as subsidies.  It also involves the participation by state governments in the process. It requires identifying ways to reduce existing debt when and as possible by making use of any surplus to incrementally retire debt load.But the whole initiative is planned as a long-term exercise by the government through a road map for fiscal reform rather than through a single Budget announcement.

 The term fiscal consolidation is most commonly employed when referring to efforts of a national government to lower the level of debt, but can also be applied to the efforts of businesses or even households to reduce debt while simultaneously limiting the generation of new debt obligations. So, the main goal of fiscal consolidation is to improve financial stability by creating a more desirable financial position.

Example of India regarding the preparation of road map for fiscal consolidation on the basic on kelkar committee (This Committee was mandated by the Finance Minister to give a report outlining a roadmap for fiscal consolidation in a medium term framework in pursuit of the FRBM Act and related targets.)

 The Kelkar committee examined various measures which are needed to be undertaken by Government for fiscal consolidation in the medium term. These measures include:

  • Raising the Tax-to-GDP ratio;
  • Policy measures for pruning expenditure on subsidies and other items of expenditure;
  • Rightsizing the size of Plan support; and
  • Steps for increasing disinvestment proceeds.
  • Reduction in subsidies