Topic 1 : Road map for fiscal consolidation
Context: We need to set a target fiscal deficit relative to GDP and the time horizon over which this target is achieved. The goal must be to get to a fiscal deficit of 3% of GDP.
Introduction
- On February 1, 2024, the interim budget, also known as the "vote on account," for 2024–25 was presented. Finance Minister Nirmala Sitharaman declared that she would not be proposing to alter the tax rates for either direct taxes or indirect taxes, adhering to the most prominent customs.
Few things stand out!
- Nevertheless, a few things stand out in the Budget.
- First, there is a continued emphasis on increasing capital expenditures of the Union government.
- And second, there is a continued emphasis on fiscal correction and consolidation.
Not Overstretched!
- The Budget for 2024-25 is not overstretched, with a buoyancy of tax revenue of 1.33 and nominal GDP growth of 10.5%. This provides a buffer for increased expenditures or reduced deficits in the future.
- The interim Budget has maintained this trend by increasing capital expenditures of the Central government, which could act as a catalyst for private investment.
- However, the growth rate of capital expenditure is higher at 16.9% compared to the Revised Estimates of 2023-24. This lower growth is associated with a real GDP growth of 7.3% in 2023-24.
- It may be possible for a 17% capital expenditure growth in 2024-25 to enable a real GDP growth of 7%, provided private sector investment picks up and the momentum of capital expenditure growth of State governments is maintained.
- The government has extended the interest-free loan facility for State governments, and the lower fiscal deficit might facilitate a lowering of interest rates later during the year.
- The capital expenditures of the Central government are not identical with gross fixed capital formation but contribute to increasing capital formation.
- For continued growth at 7%, an investment rate of 35% is required, assuming an Increment Capital Output Ratio (ICOR) of 5.
- As per NSO's first advance estimates for 2023-24, the gross fixed capital formation to GDP ratio at constant prices is 34.9%. If government capital formation falls in 2024-25, private sector investment may have to increase.
Fiscal deficit target
- The fiscal deficit for 2024-25 is expected to go down to 5.1%, a decline of 0.7 percentage points from the previous year. This is in accord with what the Finance Minister had earlier stated.
- While this bold step in a Budget before the election is welcome, we need to have a good road map to achieve what our target is.
- This has to be 3% of GDP for the Central government and not 4.5% of GDP. Together with State governments, the target fiscal deficit can be 6% of GDP.
- We need to understand the logic behind this number. It is linked to household savings in financial assets and a net inflow of resources from abroad.
Importance of Household sector
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- The household sector is the only surplus sector in the economy. The surplus of this sector needs to feed the public sector as well as the private corporate sector. If the household savings in financial assets were increasing, it may be possible to make some adjustments to the desired level of fiscal deficit.
- However, recent numbers show household savings in financial assets going down. The committee that was appointed to look at the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 wanted that the debt-GDP ratio of the Centre and States taken together should not exceed 60%.
- For the Centre, the target level was indicated at 40%. There is no clear logic for this number if the Centre’s target fiscal deficit is kept at 3% of GDP.
- The corresponding level of Centre’s debt would be 30% of GDP with an underlying nominal growth of 11.1%.
- Simulations indicate that given the current consolidation path, if a 3% fiscal deficit is reached by 2028-29 and maintained at this level thereafter while sustaining a nominal GDP growth of 11.1%, a 40% debt-GDP ratio for the Centre would be reached by 2034-35.
Conclusion
- Any fiscal deficit of the Centre and States taken together substantially above 6% of GDP can only lead to inflation. We need to set a target fiscal deficit relative to GDP and the time horizon over which this target is achieved. The goal must be to get to a fiscal deficit of 3% of GDP each for the Centre and the States.
Topic 2 : Equity concerns in banning fossil fuel extraction.
Context: India and other like-minded developing countries need to call out the hypocrisy of some of the developed countries
Introduction
- A growing body of evidence is supporting the phase-out of fossil fuel subsidies and the outright prohibition of fossil fuel extraction, as a result of governments' and corporations' inadequate response to the issue of climate change. This has resulted in a dramatic increase in climate change litigation worldwide.
Fossil Fuel Non-Proliferation Treaty
- Momentum is also growing in favour of a Fossil Fuel Non-Proliferation Treaty. There is a proposal in academic literature which sets out the case for a coal elimination treaty by 2030 with the aim of phasing out the mining and the burning of coal.
- The rationale behind this is linked to the Production Gap (Production Gap Report, or PGR 2023) that exists between the plans by fossil fuel producing countries to produce 110% more fossil fuels by 2030 and their incompatibility with the goal of the Paris Agreement 2015 to keep warming below 1.5° Celsius as compared to pre-industrial levels.
Phasing out Fossil fuels: Emergence and issues!
- The element of phasing out fossil fuel emerged for the first time in the United Nations Framework Convention on Climate Change (UNFCCC) at COP26 in Glasgow, in 2021, which made a reference to phasing down unabated coal power and phasing out inefficient fossil fuel subsidies.
- In fact, there was a call by many to phase out coal and fossil fuel subsidies. COP28 in Dubai in 2023, in Dubai, also adopted a decision relating to the transitioning away from fossil fuels in energy systems, so as to achieve net zero emissions by 2050 in keeping with the science.
- The question that remains to be answered is how to align these proposals with the anchor sheet principles of the climate change regime — the Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC) and Nationally determined contributions (NDC).
- The UNFCCC, the Kyoto Protocol and the Paris Agreement are aimed at the reduction of greenhouse gases and removal by sinks in conformity with the CBDR-RC.
- The latter, governed by the criteria of per capita emissions, historic emissions made by a developed country party and the financial and technological resources (which a developed country commands as compared to a developing country), faces serious challenges when applied in the context of fossil fuel extraction.
- Those countries that are heavily dependent on revenues and employment in the fossil fuel sector are likely to experience serious difficulties in transitioning away from fossil fuel.
International law and fossil fuel
- In the international legal system, a state is within its rights to use natural resources lying within its territory for its economic development. But this is accompanied by a caveat not to cause significant harm to another state when a natural resource is trans-boundary in nature.
- The prevention of harm to another is a due diligence obligation, and a state has to undertake all appropriate measures in light of the magnitude of the proposed project having trans-boundary consequences.
- The obligation has been largely tested in international water course situations and the International Court of Justice (ICJ, 2010) in the Pulp Mills Case described conducting trans-boundary environmental impact assessment (EIA) as part of customary international law.
- This duty is linked to a bilateral situation and its application in the context of a global commons is so far unclear, which amounts to saying that a state cannot be expected to undertake EIA for extraction of fossil fuel for its effects on the global environment other than local.
- Scholars from the West are taking a legally ill-founded plea that states are required to conduct an EIA for their fossil fuel extraction to prevent global warming.
- They are also propagating the human rights consequences of fossil fuel extraction on the local population and indigenous people in the tribal areas of Chhattisgarh, Jharkhand and Odisha in violation of the UN Declaration envisaging free prior informed consent of the tribal people.
- The basis of the Paris Agreement is NDCs, which does not bind a state to prohibit fossil fuel extraction.
India’s situation
- Despite India’s notable progress in renewable energy systems, fossil fuel continues to dominate India’s power sector.
- Nearly 3.6 million people in 159 districts are rooted in the fossil fuel economy through direct or indirect jobs related to the coal mining and power sector.
- A country such as India, which is facing serious unemployment concerns, cannot afford to transit towards cleaner fuel without adequate transition support and creation of suitable economic opportunities and livelihoods for those affected.
- India’s subsidies on kerosene oil have come under scrutiny in the West as it is found to be inconsistent with Article 2(1)(c) of the Paris Agreement and is also considered as inefficient subsidies.
- In line with the CBDR-RC, India has given a clear hint of a differential time-frame at COP26 when it intervened and succeeded in toning down the language from “phasing out” to “phasing down” unabated coal.
Way forward
- Since the majority of major fossil fuel producers—including the United States, Canada, and Australia—plan to increase production while expecting developing countries to drastically shift their economies with little assistance, India must rely on its coalition building strategy with like-minded developing country parties to counter the hypocrisy of developed country parties.