Editorial 1:Stick to fiscal deficit as the norm for fiscal prudence

Context

With the current lower levels of household financial savings, having 3% of GDP as a limit to fiscal deficit should be the focus.

Introduction

Government expenditures exceeding revenue by a high margin can lead to a difficult situation. In the 1980s, rising fiscal deficit accompanied by rising government debt led to a difficult balance of payments situation and a high ratio of interest payment to revenue receipts. This forced the government to borrow progressively more to meet developmental expenditures.

What are the key budget pointers?

• Final Budget 2024-25 targets: According to Finance Minister, from 2026-27, the aim is to reduce the fiscal deficit annually to lower Central government debt as a percentage of GDP. The Budget speech also plans to cut the fiscal deficit to 4.5% of GDP in 2025-26, down from 4.9% in 2024-25.
• The Centre’s debt-GDP ratio: Is estimated at 54% in 2025-26, assuming a nominal GDP growth of 10.5% in these two years.
• Declining debt-GDP ratio: After this, the central government aims to have only a reducing path of debt-GDP ratio without stating a debt-GDP target and specifying a path to reach that.

• This implies effective abandoning of the Centre’s Fiscal Responsibility and Budget Management (FRBM) 2018 debt-GDP target of 40% for the central government and 60% for the combined government for an indefinite period.
• With a nominal GDP growth of 10%-11%, a consistent decline in the debt-GDP ratio can be achieved annually, while keeping the fiscal deficit-GDP ratio for the Centre at 4.5%. At this fiscal deficit level, the debt-GDP ratio is projected to fall to 48% by 2048-49, with a continuous decrease throughout the period
• Targets of state governments: In their respective Fiscal Responsibility Legislations (FRLs), have adopted a fiscal deficit-Gross State Domestic Product (GSDP) target of 3%.
• They might ignore their targets and focus only on reducing debt-GSDP ratios. If both levels of government maintain average fiscal deficits of 4.5% and 3% of GDP (excluding intergovernmental lending), the combined deficit could average 7.5% of GDP for several years
• Limited Private space: Such a profile of debt and fiscal deficit, while consistent with a falling debt-GDP/GSDP profiles, would leave little space for the private sector to access available investible surplus unless current account deficit is increased beyond sustainable levels. 

What is the scope of Private Sector investment?

• Arguments of The Twelfth Finance Commission: Had argued that the investible surplus for the private corporate sector and the non-government public sector can be derived as the excess of household financial savings and net inflow of foreign capital over the draft of this surplus by the central and State governments through their borrowing.
• Key Observations: “Household sector transferable savings of 10% of GDP, along with a current account deficit of 1.5%, would support a government fiscal deficit of 6%, private corporate sector absorption of 4%, and non-departmental public enterprises’ absorption of 1.5% of GDP.
• Declining Household Savings and Its Impact on Fiscal Deficits: Household savings have recently dropped to 5.3% of GDP in 2022-23, down from 7.6% in the years before, excluding 2020-21. With 5.3% in savings and 2% from foreign capital, the total investible surplus of 7.3% will be used up by the central and state governments’ fiscal deficits of about 7.5% of GDP. We can only increase fiscal deficits if household savings go up.

What is the link between Fiscal Deficit and Debt-GDP ratio?

• The arithmetic relationship between fiscal deficit and debt-GDP ratio: To reduce the debt-GDP ratio, one has to act on fiscal deficit-GDP ratio, which essentially means change in the debt-GDP ratio between two consecutive years.
• The fiscal responsibility framework: Has been built in India after 2003, with States coming on board with their respective FRLs, has considered suitable combinations of debt-GDP/GSDP levels along with fiscal deficit-GDP/GSDP levels. 

The Indian scenario

• Significance of High debt-GDP ratio: if remains relatively high compared to the norms given in the FRLs of the Centre and States, the ratio of interest payment to revenue receipts would also remain high, pre-empting government’s revenue receipts while leaving progressively lower shares for financing non-interest expenditures.
• The ratio of Centre’s interest payment to revenue receipts net of tax devolution: The Centre’s interest payments as a percentage of revenue receipts net of tax devolution rose from 35% in 2016-17 to an average of 38.4% between 2021-22 and 2023-24. Including all transfers, such as tax devolution and grants, this ratio averaged 51.6%.

Comparing the Indian and the International scenarios

• Debt-GDP and Low interest payment: Many countries have higher government debt-GDP ratios than India but lower interest payments relative to their revenue receipts. For example, from 2015-19, Japan, the UK, and the US had average interest payment ratios of 5.5%, 6.6%, and 8.5%, respectively. In contrast, India’s average interest payment to revenue receipts ratio was 24% from 2015-16 to 2019-20, with the Centre’s post-transfer ratio averaging 49%.
• Policy initiatives: Recent statements highlight the debt-GDP ratio as a key policy variable but lack specific targets and pathways for India to achieve them. For example, the central debt-GDP ratio surged from 50.7% in 2019-20 to 60.7% in 2020-21 within a year due to the COVID-19 pandemic.
• The Macroeconomic shock: However, returning to the pre-COVID-19 level of debt-GDP ratio has taken much longer and we are still nowhere close to reaching that. The paths of adjustment of upward and downward movements of debt-GDP ratio due to a macroeconomic shock often tends to be asymmetric.

Conclusion

Governments find it convenient to keep postponing the downward adjustment in the debt-GDP ratio while continuing to nurse high levels of interest payment relative to revenue receipts. There is no point in urging private investment to grow if the available investible surplus is limited. With the current lower levels of household financial savings, it is better for the central government to stick to 3% of GDP as a limit to fiscal deficit. We need to draw up a road map to achieve that level. Any relaxation of this rule will only lead to fiscal imprudence. Thus, focus should be more fiscally comprehensive along with policy support.

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Editorial 2: ​A tourism policy ill-suited for Jammu and Kashmir

Context

The damage being caused to the region’s fragile environment highlights the need for a resilient and sustainable tourism model.

Introduction

In the collective consciousness, Kashmir remains an Eden, but time has changed its environment. The relentless march of urbanisation and commercialisation has inflicted grievous wounds on this once pristine sanctuary. The manifestations of climate change are also evident.

Effects of new policy 

• Ecological Concerns: The influx of tourists is causing great stress to the Valley’s delicate ecological equilibrium.

• The Jammu and Kashmir government’s recent tourism policy efforts, ostensibly to project an image of tranquillity and normalcy after the dilution of the region’s special status, have had significant environmental repercussions.
• According to official data, over four crore tourists have visited Kashmir since the announcement of a new tourism policy in 2020. In the first half of 2024, 1.2 million tourists arrived in Kashmir. 

• The unbridled escalation in tourist activities: Propelled by the administration’s endeavours to showcase the Valley’s newfound stability, is causing an array of ecological disturbances.
• Inadequate waste management systems: Are worsening pollution levels in waterbodies, further compounding the ecological degradation.
• Rise in Pilgrim Tourism: The promotion of pilgrimage tourism in Jammu and Kashmir, particularly in areas such as Pahalgam and the Trikuta ranges where the Mata Vaishno Devi temple is located, has significantly strained the fragile ecosystem.
• Core environmental concerns: The influx, often exceeding the region’s carrying capacity, has led to deforestation, waste accumulation, and unregulated construction. Unchecked tourism that was a key factor contributing to the 2014. catastrophic floods.
• Rise in unsustainable infrastructure: The influx of visitors necessitates the expansion of infrastructure from hotels, roads, and recreational facilities, that invariably encroach upon natural habitats.
• Heavy environmental cost due to construction activities: It only disrupts wildlife corridors but also leads to deforestation, exacerbating soil erosion and affecting the landscape.
• Rising risks due to rising utility needs:  The heightened demand for water and electricity strains local resources. 

• Unchecked withdrawal of groundwater is depleting aquifers at an alarming rate, while increased electricity consumption necessitates greater reliance on hydroelectric projects.
• These projects, though renewable in nature, can devastate local aquatic ecosystems and alter the hydrological balance. 
• Drinking water concerns: There is an acute shortage of drinking water in many areas of Kashmir. The depletion of glaciers at a faster rate due to climate change has led to water scarcity.

• The Valley is facing an imminent agricultural drought, a situation exacerbated by below-average rainfall and erratic weather patterns.
• The region is witnessing less water in rivers and streams, in turn affecting irrigation.
• Drought also threatens crop yields, which could lead to economic distress for farmers and potential food shortages.
• Climate change poses long-term challenges to Kashmir’s agricultural sustainability and food security. 

The fragility of the region

• Disaster prone region: Jammu and Kashmir is a region that is affected by natural disasters such as earthquakes, floods, landslides, and avalanches.

• The region also lies in a seismically active zone.
•  The catastrophic floods of 2014 caused widespread destruction, submerging large parts of the Kashmir Valley, damaging infrastructure, and displacing thousands of people.
• Around five million people were affected — around 4.5 million in the Valley and half a million in the Jammu region.
• Cost of a disaster:  The State’s economy suffered an estimated loss of ₹5,400 crore-₹5,700 crore. In 2022, flash floods caused by a cloudburst near Amarnath killed 16 people and left 40 missing.
• Development damaging the ecosystem: The construction of roads to unexplored tourist destinations, where the intent is to boost accessibility and economic growth, often ends up disrupting fragile ecosystems. 
• Thus, it is a moment of caution in regions such as Kashmir, which have a delicate ecosystem. The landslide in Wayanad, Kerala, which claimed over 200 lives, is a stark reminder of the grave dangers posed by unchecked commercialisation in ecologically sensitive regions.

Way forward: Have a new model 

The natural beauty of Kashmir is a significant draw for tourists, but the push for commercialisation through the construction of hotels, resorts and other infrastructure can have catastrophic consequences if not managed sustainably. The region’s fragile environment necessitates the adoption of a resilient and sustainable tourism model. In Jammu and Kashmir, this would involve promoting eco-friendly practices that minimise environmental degradation such as reducing waste, conserving water, and protecting biodiversity. It also requires the inclusion of local communities in tourism planning and decision-making. 

Conclusion

Building resilience requires infrastructure that can withstand extreme weather, diversifying tourism offerings beyond just the peak seasons, and creating policies that protect the interests of both tourists and locals. By adopting a resilient and sustainable tourism model, Jammu and Kashmir can safeguard its natural beauty, support local communities, and ensure that tourism remains a viable economic driver for generations to come. This shift is not only necessary but also urgent in order to balance economic development with environmental conservation and social equity in the region.