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.
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- 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.
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- 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):
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- 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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