India Meets Fiscal Deficit Target for 2024-25

PWOnlyIAS

May 31, 2025

India Meets Fiscal Deficit Target for 2024-25

The Government of India successfully met its fiscal deficit target of 4.8% of GDP for the financial year 2024-25, as per provisional data released by the Controller General of Accounts (CGA).

  • Fiscal Deficit in Line with Target: Fiscal deficit stood at ₹15.77 lakh crore, equivalent to 4.8% of GDP.
    • This is in line with the target set in the revised estimates, despite a slight revenue shortfall.

Government Finances in 2024-25

  • Total Receipts: The Centre’s total revenue (tax, non-tax, and capital receipts) amounted to ₹30.78 lakh crore.
    • This is 97.8% of the revised estimates, indicating a small shortfall.
  • Total Expenditure: The government spent ₹46.55 lakh crore, also 97.8% of the revised estimate.
    • Capital expenditure: ₹10.52 lakh crore (103.3% of target), Indicates strong investment in asset creation.
    • Revenue expenditure: ₹36.03 lakh crore (2.5% lower than estimated), Includes salaries, pensions, interest payments, and subsidies.

Fiscal Deficit Target for FY 2025-26

  • Lower fiscal deficit target of 4.4% of GDP for the current financial year 2025-26.
  • It is  part of the government’s ongoing fiscal consolidation path.

Fiscal Deficit

  • About: Fiscal deficit is defined as excess of total expenditure over total receipts excluding borrowings during a fiscal year.
    • It reflects the borrowing requirements of the government for financing the expenditure including interest payments.
  • Formula: 
    • Fiscal deficit = Revenue expenditure + capital expenditure – Revenue receipts – capital Receipts excluding borrowings.
  • Indicator of Future Liabilities: It is an indicator of the increase in future liabilities of the government on interest payment and loan repayment.

Implications of High Fiscal Deficit

  • Inflationary Pressure: Governments may finance deficits by borrowing from the central bank, increasing the money supply.
    • This can lead to demand-pull inflation, especially if the economy is near full capacity.
  • Higher Interest Rates (Crowding Out Effect): Government borrowing competes with the private sector for funds in the financial market.
    • This can drive up interest rates, discouraging private investment and slowing economic growth.
  • Debt Burden: Persistent fiscal deficits lead to accumulation of public debt.
    • Servicing this debt (interest payments) consumes a large portion of future budgets, reducing fiscal space for productive spending.
  • Currency Depreciation: High fiscal deficits can lead to concerns about economic stability.
    • This might cause foreign investors to pull out, leading to currency depreciation and further inflation through costlier imports.
  • Stimulating Economic Growth (Keynesian View): During recessions or slowdowns, fiscal deficits can be counter-cyclical, boosting demand via government spending.
    • This can help in reviving economic activity, creating jobs, and increasing incomes.

Common Methods of Fiscal Deficit Financing

  • Borrowing from Domestic Sources: 
    • Market Borrowing: Issuing government bonds, treasury bills.
    • Banks and Financial Institutions: Loans from public sector banks or development banks.
  • Borrowing from External Sources:
    • Multilateral and Bilateral Agencies: World Bank, IMF, Asian Development Bank.
    • Foreign Governments and Markets: Sovereign bonds or loans.
  • Monetization of the Deficit: 
    • Borrowing from the Central Bank: The Reserve Bank of India prints new money to buy government securities.
    • This increases money supply and can lead to inflation.
  • Small Savings and Public Provident Funds (PPF): The government borrows from the savings of citizens via schemes like National Savings Certificates.

Importance of Fiscal Consolidation

  • Ensuring Sustainable Public Finances: Gradually reducing the fiscal deficit-to-GDP ratio helps maintain economic stability and ensures that public finances remain sustainable.
    • It prevents excessive borrowing and debt accumulation, which could jeopardise future economic health.
  • Implementing Prudent Fiscal Policies: Effective fiscal management involves expenditure rationalisation, revenue enhancement measures, and subsidy reforms. 
    • These actions help reduce reliance on borrowing and address fiscal imbalances, fostering a more balanced and sustainable budget.
  • Promoting Investor Confidence: A disciplined approach to fiscal management enhances investor confidence. 
    • Lower fiscal deficits and stable debt levels signal a commitment to fiscal responsibility, making the country more attractive to both domestic and international investors.

Government Initiative Related to Fiscal Deficit Management

  • Fiscal Responsibility and Budget Management Act (FRBM Act), 2003:
    • About: FRBM Act establishes financial discipline to reduce fiscal deficit. It aims to manage fiscal deficit, and maintain macroeconomic stability. 
    • Key features of the FRBM Act
      • Medium Term Fiscal Policy Statement: It lays down the limits on the size of the budget deficits for three years and targets for tax and non-tax receipts.
      • It sets a target for the Centre’s annual fiscal deficit ratio (FDR) at 3% of gross domestic product (GDP). 
      • The states had to legislate their own FRBM Acts, limiting a state’s FD to 3% of its own GDP.
  • FRBM Review Committee Report (Chairperson: N.K Singh):
    • Debt as a Primary Target: The Committee suggested using debt as the primary target for fiscal policy.
    • Debt to GDP Ratio: The FRBM Review Committee Report has recommended a debt to GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments.
    • Borrowing from RBI: According to the suggestions of the committee, the government must not borrow from the RBI, except when:
      • The Centre has to meet a temporary shortfall in receipts.
      • RBI subscribes to government securities to finance any deviations.
      • RBI purchases government securities from the secondary market.
    • Fiscal Council: The Committee proposed to create an autonomous Fiscal Council with a Chairperson and two members appointed by the centre. 
    • Deviations: The Committee noted that under the FRBM Act, the government can deviate from the targets in case of a national calamity, national security or other exceptional circumstances notified by it. 

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Comprehensive coverage with a concise format
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