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.