Brief Context
Context The Government of India has 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). What is the fiscal deficit? Fiscal Deficit is defined as excess of total budget expenditure (revenue and capital) over total budget receipts (revenue and capital) excluding borrowings during a fiscal year.
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Syllabus: GS3/ Economy
Context
- The Government of India has 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).
Key Highlights of the FY25 Fiscal Performance
- In 2024–25, the Government of India recorded a fiscal deficit of ₹15.77 lakh crore, which amounted to 4.8% of the GDP, in line with its revised estimates.
- The central government’s total revenue stood at ₹30.78 lakh crore.
- Net tax revenue amounted to ₹24.99 lakh crore, which was 97.7% of the government’s target.
- The government earned ₹10,131 crore from disinvestment of public sector undertakings in 2024–25.
- This contributed to the miscellaneous capital receipts but remained far below the target.
- Total government expenditure stood at ₹46.55 lakh crore, which was 97.8% of the revised estimate.
- Capital expenditure, which refers to spending on long-term assets like infrastructure, reached ₹10.52 lakh crore.
- Revenue expenditure stood at ₹36.03 lakh crore.
What is the fiscal deficit?
- Fiscal Deficit is defined as excess of total budget expenditure (revenue and capital) over total budget receipts (revenue and capital) excluding borrowings during a fiscal year.
- Fiscal Deficit = Total Expenditure – (Revenue Receipts + Non-Debt Creating Capital Receipts).
Implications of fiscal deficit
- Inflationary Pressure: Persistently high fiscal deficits lead to inflation as governments resort to central bank-issued money to finance the deficit.
- Crowding Out effect: When the government borrows a large portion of available funds from financial markets to finance its deficit, it crowds out private investment with reduced access to credit for businesses and individuals.
- Reduced Fiscal Space: A high fiscal deficit limits the government’s ability to respond to economic shocks or crises.
- Difficulty in borrowing: As a government’s finances worsen, demand for the government’s bonds begins to drop, forcing the government to offer to pay a higher interest rate to lenders.
Benefits of lower fiscal deficit
- Improved Credit Ratings: Consistent deficit reduction enhances international credit ratings, lowering borrowing costs in global markets.
- Reduced Debt Servicing: Less spending on interest payments frees funds for development projects like infrastructure, education, and healthcare.
- Improved Balance of Payments: Lower reliance on foreign borrowing stabilizes the exchange rate and current account.
- Enhanced Investor Confidence: Signals fiscal discipline, attracting greater foreign and domestic investments.
| NK Singh committee recommendation – Debt to GDP ratio: The Committee suggested using debt as the primary target for fiscal policy. A debt to GDP ratio of 60% should be targeted with a 40% limit for the center and 20% limit for the states by FY23. – The fiscal deficit to GDP ratio of 2.5% by FY23. – Fiscal Council: The Committee proposed to create an autonomous Fiscal Council with a Chairperson and two members appointed by the center. The role of the Council would include: 1. Preparing multi-year fiscal forecasts, 2. Recommending changes to the fiscal strategy, 3. Improving quality of fiscal data, 4. Advising the government if conditions exist to deviate from the fiscal target. – Deviations: The Committee suggested that grounds in which the government can deviate from the targets should be clearly specified, and the government should not be allowed to notify other circumstances. |
Source: TH