Fiscal Prudence vs. Populism:

How successful was the government in maintaining the pace of fiscal consolidation (reducing the Fiscal Deficit as a % of GDP) while simultaneously managing major economic shocks (Demonetization, COVID-19, and global inflation spikes)?

The government’s success in maintaining the pace of fiscal consolidation (reducing the Fiscal Deficit as a percentage of GDP) while simultaneously managing major economic shocks has been a story of initial discipline, extreme stress, and a remarkable post-COVID-19 recovery and recommitment to the path.

By 2025, the government has successfully re-established a credible glide path for fiscal consolidation, though the timeline was severely derailed by the pandemic.

1. The Pre-COVID-19 Phase: Discipline and Early Shocks (2016–2020)

In the period leading up to the COVID-19 pandemic, the government generally demonstrated fiscal prudence, successfully managing two major domestic shocks without severe fiscal slippage.

• Initial Trend: The Central Government Fiscal Deficit was steadily brought down from the pre-2015 average, eventually reaching 3.4% of GDP in FY 2018-19.

• Demonetization and GST (2016-2017):

  • Fiscal Impact: Demonetization caused a short-term economic contraction, which would typically depress tax revenue. However, the subsequent formalization driven by Demonetization and the introduction of GST (2017) led to tax buoyancy in the medium term, helping to offset the initial revenue loss.

  • Result: While the economy faced disruption, the structural reforms ultimately supported revenue collections, allowing the government to maintain the consolidation path with only minor deviations.

2. The COVID-19 Shock: The Unprecedented Rupture (FY 2020–2021)

The COVID-19 pandemic completely derailed the fiscal roadmap, forcing the government to prioritize counter-cyclical stimulus and social safety nets over consolidation.

• Massive Fiscal Slippage: The Fiscal Deficit soared to an unprecedented 9.2% of GDP in FY 2020-21. This was a necessity, driven by:

  • Revenue Collapse: The nationwide lockdown led to a sharp contraction in economic activity, causing tax collections to collapse.

  • Expenditure Surge: The government launched large welfare and relief programs (like PM Garib Kalyan Yojana) and provided massive liquidity support (Emergency Credit Line Guarantee Scheme - ECLGS).

• Deviation from FRBM: The deficit target of 3% by FY 2020-21, set by the Fiscal Responsibility and Budget Management (FRBM) Act, was rendered obsolete. The government used the FRBM's "escape clause" (allowing deviation for unforeseen contingencies) but the scale of the crisis necessitated a formal revision of the entire path.

3. Post-COVID Consolidation and Recommitment (2021–2025)

The government's performance in the post-pandemic years has been a strong display of commitment to fiscal discipline, even while managing global inflation spikes.

Success Factors in Post-COVID Consolidation:

1. Revenue Buoyancy: The systemic reforms (GST, formalization) paid major dividends, leading to record-high tax collection rates (Tax-to-GDP ratio improving) that helped offset higher expenditures.

2. Expenditure Quality: The government prioritized increasing Capital Expenditure (Capex) as a percentage of GDP (reaching over 3.1% in the FY26 budget) while simultaneously showing restraint on overall revenue expenditure (subsidies, non-developmental spending). This shift supports long-term growth and tax base expansion.

3. Credible Roadmap: The government established a new, realistic fiscal glide path targeting a deficit below 4.5% of GDP by FY 2026-27, a target widely viewed by international agencies and domestic economists as credible and achievable.

The government was highly successful in the pre-COVID era by managing domestic shocks and steadily reducing the deficit. The COVID-19 crisis necessitated a massive, justifiable fiscal expansion. However, the subsequent, multi-year, and consistent reduction in the fiscal deficit (from the peak of 9.2% down to the targeted 4.4% by FY 2025-26) demonstrates a strong and successful recommitment to fiscal prudence that has maintained policy credibility despite ongoing global shocks.⁵