Answer:

Fiscal consolidation (FC) means reducing fiscal deficit (FD) by reducing public expenditure and/or increasing the revenue. The aim is to discipline the public finances and is enjoined by the FRBM Act, 2003 (which intends to cap the Fiscal deficit to 3% of GDP). Public investment means committing public money to various socio-economic objectives. It is often seen that public investment is curtailed to cater the needs of fiscal consolidation. Both these objectives have been contested, with arguments on both the sides.

Fiscal Consolidation (FC)

A. Significance

♤ Large FD means government as the major borrower leaving private sector short of credit for investment.

♤ High FD adds to interest burden on the government, thereby diverting the money from productive sectors. At present, interest payments at the Union level, account for almost 50% of their net tax revenues.

♤ High FD increases the interest rates in the economy, thereby fuels inflation.

Therefore, the importance of FC can’t be overstated. Hence, the credit rating agencies

consider FD as an important variable to assess the credit worthiness of an economy.