Economic Survey 2025-26 | Chapter 2 : Fiscal Developments | Detailed Analysis by Vibhas Sir | UPSC

[music] Good afternoon all of you. Uh good to connect with all of you after some time. Unfortunately, I went unwell at the wrong time. So, I'm continuing with economic survey and we will have a budget discussion also very soon hopefully on the coming Saturday only. I'm recording these videos. Today is Tuesday. Uh I'm recording this video in the afternoon uh say 24th of February and I plan to take the budget also by this weekend and I will continue with economic survey sessions and you will keep receiving them on YouTube. So stay tuned on next is channel and we will keep giving you the the economic survey chapters. Uh it is just that I'm not doing it live because fixing a time was not becoming very easy. So I thought okay I'll do the recording and share it with you. All right. So we begin with chapter 2. Today we begin with the of of economic survey. So that is on fiscal policy of this chapter that you will need in this chapter. You will get too many data from prelims point of view. You will also get a lot of material that you can add in your answers in your mains exam. If you are writing on tax reform, if you are writing on fiscal stability, consolidation of the fiscal policy, disinvestment of public sector, uh GST reforms. So you know several points you will get in this chapter. I will keep highlighting them to you but keep it as that in the mind. So the chapter begins by survey saying that India has had the rating upgrade by three different ratings. Standard and poor is a major rating which has given us an upgrade. Rating upgrade. What does it mean? That Indian government bonds and Indian market bonds will now be taken as a more safer place to invest in in the global market. So many global investors will then choose to invest in India. That is the meaning of a rating upgrade that when my rating is upgraded, I'm considered to be a more solvent country and more people will choose to invest in my country. deficit paying capacity, foreign exchange reserves, inflation control. So macroeconomic stability plays a very important role in rating upgrade and survey says it is due to prudent fiscal management. You know, prudent fiscal uh management that is one thing. It also says that it is due to I mean the rating upgrade is due to deficit reduction revenue buoyancy. So this we will discuss as we go further but fiscal deficit has been reduced. Uh fiscal management has been prudent. We have had more capital expenditure less revenue expenditure growth. Revenue buoyancy has been high. Tax collection has been happening at a faster pace. Uh expenditure quality capex I already told you. And there is more fiscal transparency as in government has a debt to GDP ratio fixed and government is continuously highlighting what they have achieved on the previous budgets announcements and all. So all that means there is more transparency and due to that we have had a rating upgrade the prelims point of view points rating upgrade India the rating upgrade of for Indian bonds or Indian market has been due to these policies. Then they come to central government finances. So they say that most important is that we had fixed a glide path of 4.5% you know we had fixed a glide path of 4.5% in fiscal year uh 2022 and we have been able to achieve those glide paths at the moment. So that is a very big important factor you know that we had fixed the glide path in the fiscal year. You know we had fixed the glide path in the fiscal year 200 uh 2022 and we have been able to achieve that glide path by 2025. Glide path glide path that how will my fiscal deficit be reduced. All right, that is the meaning of glide path. So they said that we had kept a glide path, a medium-term glide path. So glide path is glide land. So it is about controlling fiscal deficit. So if you recall during covid pandemic our fiscal deficit had reached 9.2%, central government fiscal deficit. So a glide path was fixed that how to reduce this fiscal deficit and government that we will reach 4.5% by fiscal year 2026. Now the budget says we will be reaching 4.4% of 20 in 2026. So this target has been achieved which is quite an achievement because even developed economies are struggling with very high fiscal deficit while India has been able to control it. So there is some sound management that we can claim. Then the the survey says further that if you look at this is what I was telling you that the fiscal deficit was as high as 9.2% and revenue deficit was 7.3% primary deficit was 5.7%. to revenue deficit revenue expenditure minus revenue receipt. Fiscal deficit total borrowing requirement of the government or fiscal deficit revenue expenditure plus capital expenditure minus revenue receiving capital receal deficit or primary deficit. Primary deficit is fiscal deficit minus interest payment. And if you see all the three have been showing a downward trend. Again prelims exam between 21 and 26 fiscal deficit has been continuously falling. Revenue deficit has been continuously falling. Answer will be true. And in fact revenue deficit it is now at its lowest since 2009. And let's not forget that during 2009 we used to be a very buoyant economy because the global markets were growing very fast and India was recording very fast growth. Revenue deficit less revenue deficit means you have more resources to spend for capital expenditure. up the the capital expenditure share this which was only 36 out of 100 in fiscal year 20 has now gone up to 71.5 of the fiscal deficit total borrow 71.5% capital expenditure or non-debt capital receipts 4.8% 8% finance revenue deficit 33.4% of the fiscal deficit. It means what that revenue deficit now is a very small part of fiscal deficit. So that allows more funds to be used for capital expenditure. If you see here in 2020 revenue deficit was a large part of fiscal deficit. A large part of fiscal deficit which left us with a lot of funds for less fund for capital expenditure. Why is capital expenditure good? Because it allows me to produce more in future capital expenditure production and that will allow my GDP to grow faster better tax revenue and I can pay back my debt. So my loans of the government become more sustainable if my fiscal deficit is relatively sorry if my if my revenue deficit is relatively lesser and my capital expenditures are high capital expenditur then of course they give us some examples of revenue buoyancy. So they say that revenue receipts yeah exam point of view so important prelims revenue receipts rose from 8.5% of GDP in the 5 years of 16 to 20 to 9.1% in 22 to 25 or role play tax revenue rising from 10.8% 8% to 11.5% of GDP between 22 to 25 in 2026 is 11.2% 2% of GDP tax revenue Q because we reduced the GST rate we reduced the income tax rate so all that has reduced tax to GDP ratio but still it is not very low and we are doing pretty okay compared to where we were 5 years ago buoyancy buoyancy percentage change in tax revenue divided by percentage change in GDP. So if this is greater than one, it implies that I my tax collection is rising faster than GDP, which means my tax base is becoming wider. I'm able to formalize the economy better. I'm able to collect more taxes by bringing more people into the tax net. All that will be when tax is buoyant. So survey claim that tax buoyancy has been pretty high in India. Then say they say important here the share of tax has direct taxes has risen from 51.9% pre pandemic to 58.8% in the fiscal year 25 direct tax to indirect tax direct tax is almost 59% indirect taxes 41%. This is good. Indirect taxes are generally regressive. Direct taxes are progressive. So that is why direct taxes are now a larger part of the of the total tax collection or gain from non-corporate taxes. Personal income tax. So people below 12 don't pay taxes in India. People in the wage income group will not pay any tax till 1275,000. So no question that poors are paying taxes in India. India's average income is 2 lak 19,000 rupees according to economic survey peranom that is our per capita income current value 29,000 peranom and our tax begins at 12 otherwise it is very rare to see a country which will not be collecting tax up to six times its average income. You know in developed countries they collect taxes from 1x4 1x3 level of average income. In India we don't do that. So assuming that even if because sometimes in newspapers I read that you know personal income tax share is rising which means burden on the workers and poorers is rising. Well people earning 1 lakh rupee per month in India are not poor. They can take themselves as poor. I can understand but they belong to top 10% of India. So I think this will be a travesty if we say that rise in non-corporate tax means that poor are paying poorers are not paying. So this consists of personal income tax and it's it also consists of the ST that we introduce on shares. All right. These are the non-corporate taxes as direct tax. Their share has been continuously rising and their buoyancy has been quite high. corporate tax corporate tax was fiscal year 2020 corporate tax was 4.5 K rupees this has increased to 10.8 8 cr rupees more than doubled. So corporate tax buoyancy is also not less or is GDP 220 trillion rupees in 2020 fiscal year or GDP projected which 360 trillion rupees. So GDP has increased by 60% and corporate tax collection has increased by more than 100%. So I think we're doing pretty okay even on buoyancy on corporate tax. Personal income tax of course are showing a huge jump and that is because of more formalization happening. Securities transaction tax are showing a big jump but that is because of large trading in the share market but major factor personal income tax. All right. Of this high buoyancy then the survey says that there is expansion of tax base. 6.9 K people were filing tax earlier in 22. Now it is 9.2 K. Similarly there is better compliance, better tax administration and rising income. So again from previous point of view tax results better due to better compliance technology enabled administration and rising incomes bringing more individuals into the tax net as I told you corporate tax collection has also showed buoyancy and has been near unity after pandemic then the RBI has given a lot of money to the government you know or yeah again uh in an RBI the aggregate profit of listed firms rose from 2.5 to 7.1 trillion doubling the corporate tax collection which I have already taught you. Of course, personal income tax year on year has grown 6.8% and corporate tax has grown 7.8%. Both of them growing almost at the level of nominal GDP growth rate showing decent buoyancy as I've already told you no tax for middle class but middle class we are a poor nation. We our average income is 20,000 per month. So automatically people earning one lakh rupee per month are not middle class. They think they are middle class but they're not middle class. No doubt about it. So I don't have in it's not that one lakh rupee means I can spend a lot in India but 1 lakh rupee doesn't mean I am poor in a country with 20,000 rupees per month income per capita you know so calling it middle class is quite a travesty top 10% middle class works for the government works for the media and works for people so the rich are taking the resources away from India while acting that they are pro poor which is happening anyways of survey introduced that we are not coercing. It is not punitive. Nudge based intervention or nudge based non-intrusive usage of data to guide and enable. That is nudge. Non-intrusive usage of data to guide and enable to nudge based intervention hints. You must pay your tax on time. See this is the money you spent here. So that means you are in the tax net and that ways more and more people are and giving messages to them today is the last day of paying the tax and that ways more and more people are in the tax net and they have given three examples. This is from main's point of view up quote processes of increasing tax revenue through nudge based method. So they nudged the foreign asset campaign and that led to declaration of more than 29,000 cr rupees in assets in the foreign countries and 1,000 K plus income. Similar similarly they made corrections under section 80 GGC and that meant that people who had excessively deducted their tax by up to 2,000 K then came back reverted and reduced that burden. Similarly, house rent allowance had been overestimated. That was something which was controlled. Similarly, improving TDS accuracy. So, you know, different methods. House rent allowance nudge that telling people look you have deducted more for house rent than what you should have and then automatically they gave more tax to the government. Similarly, improving tax deduction at source accuracy. [clears throat] tax. So they have to deduct the tax at source and that if it improves better tax collection can be done. Excise duty and customs duty have gone down. Excise duty has gone down because petroleum prices have gone down and and taxes on petrol has gone down. Customs duty has gone down because import duty has gone down. So indirect taxes share has gone down. Direct tax share has gone up. In GST they say that the gross tax collections reached 17.4 lakh K in April to December only which is the highest that India has recorded and it has been growing 6.7% year on year in spite of don't forget in spite of GST rate rationalization in September 2025. September 25 GST rates 28% bracket 18 12% bracket five many commodities were shifted to 0% and c was removed and now we only have a syntax of 40% on only six types of commodity on all others it is 18 or five and we see however that when it comes to nominal GDP growth and GST collection we see that has been rising quite fast this is the yearon-year growth you know that that we are yearon-year collection that we are having and growth has been quite healthy except for last year because of GST rate rationalization. So they say that tax base has expanded GST collection 60 registered 1.5 registered. Similarly survey expects that reforms will help in rationalizing the tax. More people will comply, register and pay their taxes. Also what is the way forward? This is way forward for GST reform. Reorient the eway bill system from enforcement to logistics. Eway bill purpose tax collection logistical support smooth transition from one state to another should happen. Eway bill should be arranged in that manner. Similarly trust your businesses. That's very important. trustbased and technologydriven compliance you know like some dealers can be given trusted dealer membership and they will be trusted because they have been regular in paying their GST etc and they will not be they will not be penalized as much and they will not have to wait long for in the queue and all and they will be given uh you know minimal checks so that it becomes easier to do business in India also in GST reform but GST reform We have now brought it to 18%, 5% and a 40% demerit rate. And this is the third pillar in tax reform after corporate tax cut and income tax reforms. Purpose is boost consumption, reduce living costs, improve compliance and correct inverted duty structure. Inverted duty structure charging more duty on in inputs and less on output. And that used to be it used to result in a lot of duty on inputs remaining unresolved in input tax credit. You know that in inverted duty structure means high import duty on input less on output. High uh you know GST on input less on output. So now if I paid higher tax on input when it came to deducting my tax obligation from output I did not have enough money. Ive paid 10 rupees tax to the government on input but the tax I have to pay on output is only six rupees then four rupees extra that I have paid the to the government did not become available to me because that was not available for input tax credit so correcting the inverted duty structure has also helped in MSMES and all so GST reform lower living cost boosting consumption better compliance and correcting inverted duty structure Now I have given you the list to miss download. I've given you major fun things that survey has given us on where the GST has been reduced and we see in agricultural inputs it has been reduced automobile parts electronics. So wherever we are focusing on make in India and agricultural goods we have been reducing this input for textile it has been reduced essential goods it has been reduced medicines it has been reduced you know hotels for pro promoting tourism and all it has been reduced insurance it has been made zero rated green goods it has been reduced so the expected impact will be lower prices higher affordability better compliance and more formalization ation. More formalization means come rate firms register GST. Then improved trade competitiveness and domestic manufacturing. Then correction of inverted duty structures in key sectors like textile fertilizer and then faster automated ITC refunds to ease working capital stress. working capital input tax credit due to less taxes on output. We will deliver it into your account to make it feasible for you to keep producing. Then of course u the non- tax revenue of center have remained stable at 1.4% of GST. non- tax revenue interest received loan interest dividend and profits this dividend and profit has jumped a lot compared to where it was mainly because RBI has been giving huge dividend to the central government. So that RBI dividend is playing a major role in this dividend and profit jumping. Of course, public sector enterprises have also made some decent profit. We will see it on the next slide and that has also improved things but majorly it is RBI which is contributing which I think should be corrected. RBI. So ideally we should not be dependent on RBI to earn profit and give money to the government. How do does RBI earn profit? By timely selling and purchase of bonds by foreign exchange reserve management. But this is not ideally done for profit. This is done for liquidity management, inflation control. So I think depending too much on RBI profit is a bad idea. Disinvestment is something we have neglected a lot. Uh we have hardly disinvested in India in the last 5 years. Not even meeting the target once and maybe because that is because of ideological blocks that government is facing. But I think we should bring it back on the burner. There is something there. Of course the total re non- tax revenue is 5.8 lakh cr. I think if we disinvest a little better this can rise by another 25%. Then of course so this I already told you sharp rise in dividend and profits of public sector higher surplus transfer from central bank and of course the improved performance of public sector banks and financial institutions. So this is what I was telling you. The number of operating central public sector enterprises is now 291 and total gross turnover is 37 lakh crit is 2.9 lakh k dividend 1.39 lakh cr. Now this is good but out of 291 operating central operating mind you central public sector enterprises we have almost half of them still running in loss. This is what the survey is not highlighting. So if they highlight they will do a good service to the country because that way we will be able to understand that yes many central public sector like in banking in defense in electronics they have done well but many others are also not doing well. It will allow for a better debate you know in the economy. Then non-debt capital receipts which will be asset monetization equity sale real estate investment trust uh invest in infrastructure investment trust you know all that is the method and there is an offer for sale in Masagon do ship builders and bank of Maharashtra Indian overseas bank so mass disinvestment earn you know so it is not huge that we are earning yes monetization of asset is earning us good survey claim that strategic disinvestment has proceeded gradually but this is not entirely true. What government has done is it has sold its shares to other government companies only. So actual privatization change in structure of holdings has not been observed. This is a reform which is waiting. This has not happened. Then what is the way forward? Strengthen receipts by selectively reducing government stakes. Survey government beyond minimum public shareholding where feasible 50% sector to call it a public sector. Government will have to keep its share above 50% to call it a public sector. Service says reduce this limit make it 26% and let the government sell its shares to the public. hold the control with 26% shares and let others also participate in the board of directors and in bringing expertise but I think again that will be difficult to to work with uh because uh not many people will be interested in taking share in the government sector if government owns 26% and has controlling stake but survey has suggested that can be done and maybe that can be a way forward also pursue phased offer for sale towards privatization privatize system but repeat for rest of the public sector to perform well. Government should privatize certain public sector which are in the non-core non-strategic area and government itself has agreed to that in its 2021 uh uh you know notification. Then survey also says that revenue expenditure has been controlled. So from 13.6% of GDP in fiscal year 22 to 10.9% and that is much below the prepandemic average also. And how has the consolidation happened? Mainly by rationalizing subsidies. What kind of rationalization? Majorly by using things like direct benefit transfer. the share of subsidies has declined from major subsidies from 1.9% of GDP to 1.1% of GDP but but we are giving free food grains to 7 around 80 K people which again if you ask me is a travesty India that we should be giving 80 k you know free food grains to people in India 80 cr people getting free food grains in India rather if we can reduce this number and focus more on bottom 50 cr or 40 cr people and give them nutrition, give them better quality food. That will be a better idea and we can also give direct benefit transfer to people immediately. The first 30 K 50 people in between bottom 75% to bottom 50% or bottom 70% to bottom 50% they can be given a direct benefit transfer and people below 50% can be given food. Current today also what is happening is we are giving food grains to people and they're selling it in the open market. So if we can shift gradually to DBT or at least give an option of DBT we will be able to rationalize it in revenue expenditure we see fertilizer subsidy is still a big number if you see it here or to finally 1.86 budget food subsidy 2.28 budget Everybody knows it spoils the land, reduces the soil carbon content, it hurts health. But still we give such huge subsidy on fertilizer which I think is again suicidal and we hardly spend money on uh research and development in agriculture. Also you know the interest payment expenditure is heavy as a burden for us. This is something the government should take care of. retire some of the old debts which have been taken at a high interest pay burden come our total revenue expenditure is 39 lakh cr as I told you the DBT has given us a gain which has reduced leakages by 3.5 lakh cr as the survey says but they say the challenge is cross subsidy in railway and power cross subsidy charging high from the freight charges in railway and subsidizing the passengers. So we have too many passengers we subsidize even AC coaches and that is something which is not correct and but then freight charges go high so people use road rather than railway for movement. Similarly in power sector we give subsidy to rich households. We give subsidy to large farmers, rich farmers and we give put an extra money extra tax on micro small medium enterprises also by saying that commercial sector will be charged more commercial and this results in misnomers that is power and railway the cross subsidization ation program which is creating a problem and as I just told you interest payment is rising a lot this is something which is requiring some more reforms so we need to have realtime collections professional treasury management of short-term surpluses and process reforms in fund release to improve our expenditure pattern crossid railway or power sector it will help you in understanding the technologydriven solution just in time approval. Just in time principle approval principle that the government will sanction the money to you in advance and if you left it unspent, it remained unspent and the money will then be wasted. borrowings had already been done and you know the interest costs will rise just in time principle is the money will not be given on on the budgeted amount alone the money will be given as as you make the expenditure. So earlier it was given as a credit. Now you can debit it from the account as and when you need it. rationalized. Just in time principle saves interest, saves the purpose of you know possibility of loans and makes expenditure more rational. That's a very good change we have done. Also another change just in time techdriven supply chain of PDS in steps taken by government for fiscal consolidation. What are the steps taken by government to rationalize revenue expenditure? What are the steps taken by government for fiscal consolidation? These points can come very handy. So almost 250 cr rupees have been saved by just making sure that there is better rationalization of place where this go down is and from where you are making procurement for food security. So make it from closer pace release it so transportation costs go down storage costs go down without hurt hurting the farmers. So you know they say 50% reduction in transportation distances and 35% lower CO2 emissions in capital expenditure as I have told you it has been continuously rising a term government survey use effective capex. So effective capex is capital expenditure done by the central government plus grants and aid given by central government to state government for capital expenditure. So capital expenditure done by central government plus grants and aid given by central government to state government for capital expenditure continuously rising trajectory from around uh you know around 1.9% of GDP to more than 4.3% of GDP and as a percentage of total expenditure it has gone up from 19% to 30.6% 6% very important keep it in mind and they say that grants in aid has supported housing jaljan mission so PM aas yoja jaljan mission and so on so the purpose is now give grant to states to create assets rather than for meeting regular expenditures alone then of course the capex composition majority they say more than half is on road railways and on uh that is road highways and on railway railways they account for over half of the total capex road highways and railways other than that there is money given to state governments for defense for telecom for housing and urban affairs and so on is defense expenditure revenue expenditure or capital expenditure both if I'm spending on buying a tank capital expenditure if I'm spending on paying salary revenue expenditure point of view but majorly our massive expenditure is on road transport and railways. They take a major major share of capital uh expenditure. All right. They are taking a major share of capital expenditure. Then of course we they talk about state government finances central government transfers to the state of the state share in central taxes continuously rising from 9% 9.5 11.3 12.9 14.2 Two centrally sponsored schemes continuously rising barring the a slight fall here. Finance commission grants has gone down to the state government and other grants and transfers have gone up. So moral of the story is that if somebody asks you is the government's grant to c state government rising answer is yes continuously rising. Why are the state governments complaining? Three reasons. Number one, their expenditures have gone up a lot which ideally they should not have done and hence obviously so people are complaining with rising expenditure compensated by not compensated by enough revenue. Number two genuine grievance states say that central is giving us money under centrally sponsored scheme but then we don't have the discretion to choose where to spend. It takes away our discretionary expenditure. And number three, states own inability to raise their own resources because they have not been able to impose tax in agriculture. They have not been able to impose housing taxes seriously. So their own lack of revenue source is also becoming a challenge. So these are the factors why state governments are complaining even though the share of state government and central government tax share is collection is rising continuously. Then they say that the 15th finance commission had recommended 1 lakh 47,000 K grant covering revenue deficit grant local body grants etc. And due to that in 26 also the state governments got the money. But survey important money transfer growth the states which have focused on capital expenditure have grown much better if human capital is focused on they grow much better rather than if they focus on short-term gratification. So alki bahin yoja mahila saman yojana can give you short-term gratification but educating the girl child skilling the women creating factories in the rural areas promoting better quality technologies promoting better connectivity to developed portions all this will give much more upliftment to people which the state governments have to focus upon. Then they also say that 15th finance commission had recommended a borrowing ceiling of 3%. Or additional 0.5% allowed state power sector reform state national pension services contribute to new pension scheme state 69,000 extra be allowed here. So the purpose is to give states the flexibility to borrow more for pension scheme and to borrow more for electricity reforms and they say that uh but the state average uh you know has climbed to 3.2% uh you know of their state GDP. The state average fiscal deficit 3.2% 2% of state GDP the central government loan you know send this is state assistance for for you know this this is this is special assistance to states for this special assistance to states for capital investment you know central government state government loan up to 1.5 lakh cr to all the states at 0% interest for 50 years so Survey says that this loan is given for capital expenditure to state fiscal deficit 2.8% 8% a but there's a large share of offbudget borrowing public sector borrowing by state public sector enterprises which we should be worried about you know the state discoms state budget so this is something where where we need to come clean the state governments Punjab you know Bihar jarant these are states which are in trouble at the moment to some extent even Tamil Nadu now you know these are state governments which are heavily indebted or getting indebted they should get careful that that indeedness doesn't rise much. Of course, you will see again a peak here because of COVID pandemic, but otherwise state government deficit is now here at 3.2%. They also say that the revenue balances have been deteriorating. This is a worrying sign. state revenue collection of in 2019 19 states were revenue surplus that is their revenue expenditure was more than their revenue received today only 11 states are revenue surplus one big reason is lot of populist freebies that have entered the picture in the last four five years tax revenue state you know state share in central government taxes But own tax colle 16 16% growth in state's own tax revenue that has not happened state own tax revenue major sources what is the major source of state's tax revenue petroleum tax it contributes to inflation contributes to high transportation cost increasing the logistical cost. Stamp duty makes land acquisition costlier. Another tax is electricity tax. This is where state tax collection has risen. But again we should get worried because ideally state should try collecting taxes from rich farmers, wealthy house owners in cities and that ways they will become better off compared to otherwise. So the revenue balances have deteriorated. the own tax revenue has increased but the expenditure has increased you know um even even further. All right this is the the data point that I have given you. Now u as I told you under SASI government has increased the loan from 12,000 K to 1.5 lakh K and states have already taken around 1.2 lakh cr out of it. It's [laughter] expected that in February March this entire 1.5 lakh cr will be taken away to your special assistance for state capital and investment si scheme fa state fiscal capacity they get easier loans for capital expenditure which gives them some more money for revenue expenditure you know easier loans for capital expenditure so some more money for revenue expenditure and since it provides interest free loans so no extra burden on state for 50 years and the allocation has been continuously rising and this is showing some positive uptake from the states also also it is it is through untied and reform-l liked components it is balancing flexibility has untied component just say in fiscal year 26 out of 1.5 lakh cr we are giving and central government is giving 68,000 cr is untied the state governments can spend it whichever way they like 80,000 K is reform linked and sector linked and 2,000 K for those states which have exceptional revenue shortfalls. So that is the again prelims point of view so important that how is this 1.5 lakh cr being has been distributed. So the state capex has gone up even though si the state capex would have come down but because of si state capex has gone up and lower income states have been able to get better support from sasci. So that is where the quality of expenditure comes in revenue expenditure by total expenditure and we see that state's quality of expenditure has been worsening and you know the the if you if you uh look at the capital outplay out of proportion of total expenditure has been falling. This is something we should get worried about and this is mainly because states have committed a lot of money in salaries, pensions, interest and populist schemes. this salary employees productivity. So if the productivity of the employee is higher and then you increase the salary you will be easily able to recover the revenue sufficient to pay the salary but we see deterioration of performance of productivity in state government but the salaries have been risen arising. Then we look at then survey does a box on unconditional cash transfer. and all the unconditional cash transfer survey there is a rapid expansion estimated at 1.7 lakh K in the fiscal year there's a five-fold increase in last 3 years it used to be 30,000 K 35,000 K today it is almost every state is now giving it I was surprised that even Tamil ladu is increasing the amount while Tamil Nadu is giving such great opportunity to work for its women educate its women Tamiladu is a model state for that still they're giving extra money in in this scheme. So it becomes lazy. You understand that this is this these kind of schemes. If government does its job of governance, they will not need these schemes. People won't need it. It is better that we make somebody capable to earn 10,000 rupees per month, 6,000 rupees per month, 8,000 per month than to give them 2,000 per month and then keep them in the low-level equilibrium survey that the estimates are placing it at between 1.2.1 to 1.2% of state GDP and they have pro they provide immediate consumption support. No doubt you get immediate consumption support but scale and persistence threaten fiscal sustainability and medium-term growth. Labor labor records will go bad. You know, they may reduce female labor force participation rate and tend to crowd out capital expenditure capital. They also say that internationally it has been observed that if it has been conditional there's one an example there of progress opportunities in Mexico and bala familia in Brazil they say that make it conditional if you send your children to school we'll give you money if you come for nutrition schemes we'll give you money then it has been productive but unconditional has always meant less productivity so overall the survey is concluding that states should rep prioritize their budgets focus on capital expenditure and unconditional transfers should be reduced. As I've already told you the revenue collections have moderated, revenue expenditure has grown a lot resulting in revenue deficit by a very large margin. And if you have high revenue deficit, we have already discussed it your capital expenditure will be low debt profile of the government that is the debt to GDP ratio. So if you see central government's debt ratio it has increased from it. So in fiscal year 19 it was relatively low during at around 50 odd%. During covid pandemic it jumped and became pretty high and now again gradually it is sliding down. So you know why is debt management important? Loan loan why should government take less loan? survey gives you three reasons. One, keeping I mean how do you manage your debt? Keep borrowing cost low and stable of interest rate. Take more loan when interest rate is low, less loan when interest rate is high. Then mitigate roll rollover interest rate and currency risk. Make sure that you have money in your hand before you have to pay rollover risk. You should not be requiring always to roll over your bonds. Make sure currency fluctuations can be managed and make sure that sudden interest rate hikes can be managed and deepening government security markets means allow more and more participation by people in giving loans to the government. But most important is consolidate your debt. reduce it. So central government has set a target that by 2031 the debt will be brought to 50% plus minus 1% of GDP. Now of course I have already told you that uh government is on track of achieving 4.4% 4% there is credible debt management and at the moment central government's debt to GDP ratio is around 56%. In the year 2025 and survey is saying we will bring it down to approximately two 20 uh 26 sorry and in 2027 it is suggested to be 55.5%. This is central government debt to GDP ratio. Central government central government debt to GDP ratio target 2031 50 plus minus 1% if central government takes less debt then central government will issue less bonds which will mean there will be less crowding out and more scope for capital expenditure even by the private sector and the cost of borrowing in the economy will not rise. There will be no liquidity challenge. Then of course they say that survey suggests we can't go back to FRBM act because there is global uncertainty so credibility will be undermined it reduces government's fiscal freedom because some pandemic if there is a sudden pandemic sudden war trumps tariff you will have to increase your fiscal expenditure what to do so FRBM at 3% used to kind of constrain that and we have hardly met the target only once we have met it. So survey says it's a bad idea. So what is the new target? Debt to GDP and that is to be achieved by 2031 at 50% plus minus 1%. So in this case government is flexible that okay if GDP is rising fast I can take slightly extra debt. If GDP is not rising fast I can reduce my debt. Also if there's a geoeconomic environment where there's sudden pandemic or war or oil prices rising government can give us support also there will be a return to a rule-based regime and globally you know every country follows it debt to GDP they don't follow fiscal deficit targeting so that ways also it will be useful so they [clears throat] say that what will be the benefit of it the debt management has been prudently done in India the fresh debt issuance is to time the Marketity marketable securities now account for 65% of liabilities market domestic market government's borrowing burden goes down the strong growth reduces the borrowing burden there is ample liquidity also uh we see that the maturity ity is now 19.1 years. There's sufficient time for government to pay back its debt. There is no there is no immediate threat. 91 crisis that you know that government doesn't have money to pay its debt. 19.1 year is the weighted average maturity. Weighted average maturity attaching weights and checking the average maturity of government borrowings. borrowing average 19 years and also that you know 27% of the debt are maturing over 5 years also the the floating rate debt are 4.1%. So interest rate risk is reduced. Most of the debt is fixed rate debt. Most of the debt is maturing after 5 years. So there is no immediate threat to India's system. The foreign exchange risk is low. External debt is only 2.6% of GDP and that also has been mainly taken from World Bank or New Development Bank or Asian Development Bank. So their institutional loans nothing much to worry about. So overall we see that we are doing pretty well with respect to debt profile of the central government. The state government's health doesn't state that good that debt to GDP is 28.1% ideally it should be 20% is 28.1% and you know the the interstate variation is very high. Some states are highly indebted some states are very low debt. We also see that uh the state development loan pricing shows weak risk differentiation due to narrow investor base state because they are taking borrowings loans from very few set of people. If they expand their market, target common people, issue it in the institutional system, they will be safer that by chance if some institution is in trouble, they will still keep getting their debt. So 15th finance commission has emphasized that that the state should be more transparent in disclosing what is their actual fiscal situation their financial position and that will help in better quality debt management of the state government. Of course they will also need timely, granular and standardized state level data. Granular point by point at each point you should have a data and investor base should be broadened. More and more people should invest in the state. Secondary market should be there for the state government loans. Then more people will participate and state government will have a broad sense of of revenue, broad sense of borrowing and they will not be dependent on few institutions. Now general government finances the services that if you look at general government means state plus center. So they say that now they remain still remain above precoid level. So at in pre-covid time we saw that gross revenue deficit was relatively lesser. We also see that gross fiscal deficit was relatively lesser. Uh the gross revenue deficit has come down. fiscal deficit is still you know slightly higher than what it was. Also the outstanding liabilities of central plus state government is still uh you know around more than 85 82% uh which is still higher than the pre-COVID level. Pre-COVID level the outstanding deficit was below 75% of GDP. It is still above 84% but we can't help it. It had reached 92% in the COVID pandemic days. So it can't be helped much there. Then uh yes, one good thing about India is that we are fiscally consolidating very fast. Developing developed Good news for India that that ways our macroeconomic stability looks in control. But I will repeat, we will have to go back to disinvestment. State governments will have to be encouraged to disinvest. We will have to encourage more workers productivity in government sector and we will have to encourage tax base increased by levying tax on all rich of India except of in irrespective of their profession. If we do all that, we will be in a better shape here because better tax collection will mean less debt and less debt will mean less crowding out. Of course, in conclusion and outlook, the survey says that capex increase and fiscal consolidation are good news for India. States have also advanced their capex scaling because of SASCI mainly. There is better targeting of subsidy. Outcome based design should be developed. State level in discipline can spill over into sovereign borrowing costs. That is interest rate for all government loans can go up. We should be careful. Local body finances should be strengthened. In this budget, they have taken steps for encouraging municipal corporations to take uh issue bonds and take money. And GST 2.0 and personal income tax reforms with digitalization in tax administration are set to broaden the tax base, reduce compliance cost, hopefully better revenue in future. This is on fiscal policy chapter in economic survey. I will try keeping it precise like this. This this will be available for download in the description section. You use that. All the best to all of you. I hope to keep meeting you frequently. Now, God bless you all. Bye-bye from my side and thank you for keeping patience with me. Thank you. [music]