Geopolitical Tensions in West Asia Pose Fiscal Risks for India, Warns Expert
West Asia tensions may heighten fiscal risks for India: Govinda Rao
Business Standard
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M Govinda Rao, a member of India's 14th Finance Commission, cautioned that escalating geopolitical tensions in West Asia could exacerbate India's fiscal vulnerabilities, reminiscent of the 1991 Gulf crisis. He emphasized the need for policy reforms to stabilize the economy and improve investment levels amid rising external shocks and declining household savings.
- 01Geopolitical tensions in West Asia could threaten India's fiscal stability.
- 02India's rupee has depreciated nearly 10% this fiscal year, making it Asia's worst-performing currency.
- 03Household savings have dropped to 5.4% in 2023-24, below the target of 10%.
- 04Rao criticized the inefficacy of existing fiscal policies, including the outdated 6% GDP deficit target.
- 05Former RBI Governor C Rangarajan highlighted the importance of fiscal policy for economic stability and development.
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M Govinda Rao, a member of India's 14th Finance Commission, warned that escalating geopolitical tensions in West Asia could significantly heighten India's fiscal risks. He described the current optimistic outlook from the finance minister as a 'veil of normalcy' that may collapse post-conflict, similar to the economic fallout from the 1991 Gulf crisis. Rao pointed out that India's rupee has depreciated nearly 10% this fiscal year, making it the worst-performing currency in Asia. He noted that household savings have plummeted to 5.4% in 2023-24, far below the targeted 10%. The existing fiscal framework, particularly the 6% GDP deficit target established by the 2003 Fiscal Responsibility and Budget Management Act, has only been met once in 2007-08, raising concerns about its relevance today. Rao criticized the underperformance of Goods and Services Tax (GST) revenues and called for reforms to reduce exemptions and improve tax buoyancy. In a related discussion, former Reserve Bank of India Governor C Rangarajan emphasized the critical role of fiscal policy in India's economy, advocating for a more responsive and adaptive fiscal strategy to meet development needs. He stressed the necessity of balancing government support with fiscal discipline to foster economic stability.
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If geopolitical tensions escalate, it could lead to higher inflation and unemployment in India, affecting the cost of living and economic growth.
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