India's Fiscal Deficit Targets | 07 Feb 2023

Why in News?

In the Union Budget for 2023-24, the government announced the adoption of relative fiscal prudence and projected a decline in fiscal deficit to 5.9% of gross domestic product (GDP) in FY24, compared with 6.4% in FY23.

• The government planned to continue on the path of fiscal consolidation and reach a fiscal deficit below 4.5% by 2025-26.

What is the Direction on Deficit Given in the Budget?

• In the revenue budget, the deficit was 4.1% of GDP in 2022-23 (revised estimate). In Union Budget 2023-24, revenue deficit is 2.9% of GDP.
• If interest payments are deducted from fiscal deficit, which is referred to as primary deficit, it stood at 3% of GDP in 2022-23 (RE).
• The primary deficit, which reflects the current fiscal stance devoid of past interest payment liabilities, is pegged at 2.3% of GDP in Union Budget 2023-24.

What are the Major Steps of Government Towards Fiscal Consolidation?

• Reduced Subsidies:
  • The government has reduced the amount of money allocated for food, fertiliser and petroleum subsidies.
    • The food subsidy in 2022-23 (RE) was ₹2,87,194 crore. In 2023-24, it has been reduced to ₹1,97,350 crore.
    • Similarly, the fertilizer subsidy in 2022-23 was ₹2,25,220 crore (RE); it has been reduced to ₹1,75,100 crore for FY24.
    • The petroleum subsidy in 2022-23 was ₹9,171 crore (RE); it has declined to ₹2,257 crore in 2023-24 (Budget estimate/BE).
  • The decrease in subsidies compared to the previous year is not as sharp, but it is still a positive step towards reaching a fiscal deficit target of 4.5% by 2025-26.
• Capital Expenditure:
  • In the Budget for 2023-24, capital spending is planned to rise to 3.3% of GDP, and the government has provided an interest-free loan of ₹1.3 lakh crore for 50 years to states to boost growth.
• Debt Management:
  • The majority of the fiscal deficit is financed through internal market borrowings, with a small portion coming from securities against savings, provident funds, and external debt.
    • In the 2023 Union Budget, India's external debt is only 1% of the total fiscal deficit, which is estimated at ₹22,118 crore.
  • The states are free to maintain a fiscal deficit of 3.5% of their Gross State Domestic Product (GSDP) with 0.5% tied to power sector reforms.

Why is Fiscal Consolidation Important for an Emerging Economy?

• Fiscal consolidation refers to the ways and means of narrowing the fiscal deficit. A government typically borrows to bridge the deficit. It will then have to allocate a part of its earnings to service the debt.
• The interest burden will increase as the debt increases. In the Budget for FY22, of the total government expenditure of over ₹34.83 lakh crore, more than 8.09 lakh crore (around 20%) went towards interest payment.

What is Fiscal Deficit?

• About:
  • Fiscal deficit is the difference between the government's total expenditure and its total revenue (excluding borrowings).
    • It is an indicator of the extent to which the government must borrow in order to finance its operations and is expressed as a percentage of the country's Gross Domestic Product (GDP).
  • A high fiscal deficit can lead to inflation, devaluation of the currency and an increase in the debt burden.
    • While a lower fiscal deficit is seen as a positive sign of fiscal discipline and a healthy economy.
• Positive Aspects of Fiscal Deficit:
  • Increased Government Spending: Fiscal deficit enables the government to increase spending on public services, infrastructure, and other important areas that can stimulate economic growth.
  • Finances Public Investments: The government can finance long-term investments, such as infrastructure projects, through fiscal deficit.
  • Job Creation: Increased government spending can lead to job creation, which can help reduce unemployment and increase the standard of living.
• Negative Aspects of Fiscal Deficit:
  • Increased Debt Burden: A persistent high fiscal deficit leads to an increase in government debt, which puts pressure on future generations to repay the debt.
  • Inflationary Pressure: Large fiscal deficits can lead to an increase in money supply and higher inflation, which reduces the purchasing power of the general public.
  • Crowding out of Private Investment: The government may have to borrow heavily to finance the fiscal deficit, which can lead to a rise in interest rates, and make it difficult for the private sector to access credit, thus crowding out private investment.
  • Balance of Payments Problems: If a country is running large fiscal deficits, it may have to borrow from foreign sources, which can lead to a decrease in foreign exchange reserves and put pressure on the balance of payments.

Conclusion

India’s priority is to recover the economy through capital expenditure (capex). With increased government investment in infrastructure, private investment will also increase, boosting the economic (GDP) growth, and as a result the ratio of fiscal deficit to GDP will decrease.

Source: TH