Finschool By 5paisa


Fiscal Deficit Target of 4.5% of GDP of FY26 is a Big Challenge

By News Canvass | Feb 09, 2024

Introduction about Indian Economy and Fiscal Deficit History

  • India’s growth trajectory is poised to leave a substantial imprint on the global stage. Projections indicate that over the next five years, India’s growth is expected to contribute significantly, accounting for 12.9% of global economic expansion.
  • This surpasses the projected share of the United States, which stands at 11.3%. India’s economic prowess positions it as a key driver of global growth in the coming years.
  • Nevertheless, the Indian economy is being buffeted by many challenges, both domestic and global. Softening global growth is already impacting the country in terms of faltering exports and slowing FDI flows.
  • At the same time, in the domestic arena, subdued consumption demand is a concern. Besides, the prospect of the El Nino phenomenon on the monsoon performance and agriculture output could be a major pain point which could dent India’s growth prospects in the present fiscal.
  • The economic travails of recent years arising from the pandemic have demanded enhanced fiscal support in all economies. Unlike the advanced economies, India maintained a prudent stance and avoided a bloating Government expenditure, which in turn, helped its macroeconomic stability in the post-pandemic scenario.
  • At a time when unprecedented inflationary conditions necessitated significant monetary tightening in many large economies, India has been able to manage its price rise and keep its fiscal targets well in sight, while at the same time ensuring that domestic demand did not collapse and infrastructure construction was escalated through a spike in public capital expenditure. This astute management of macroeconomic conditions helped impart strength to growth forces.
  • The Government well recognizes the need to maintain fiscal discipline and to continue on the path of fiscal consolidation. This has been evident from the Union Budget 2023-24 where the Government has adhered to its fiscal deficit target of 6.4% of GDP for FY23 to promote resilience and macroeconomic stability.
  • The fiscal deficit is also slated to be reduced to 5.9% in FY24, thereby signalling the Government’s strong commitment to continue the path of fiscal prudence. Once economic recovery strengthens, the Government may go for a large fiscal consolidation of about 1.5 percentage point over FY25 and FY26 to meet its medium-term fiscal deficit target of 4.5% by FY26.

What is Fiscal Deficit?

  • Fiscal deficit is a result of the government’s total expenditures exceeding the revenue that it generates, excluding money from borrowings. A significant fiscal deficit can lead to a higher national debt and increased costs related to debt servicing.
  • This can adversely affect the economy, potentially devaluing the national currency and hindering private sector investments.

Why Fiscal Deficit management is important??

  • Fiscal deficits can have a number of consequences, both positive and negative.  When the government borrows money to finance a deficit, it can drive up interest rates for businesses and consumers. This can make it more expensive to borrow money, which can slow down economic growth.
  • If the government borrows too much money, it can lead to inflation, as the government may be forced to print more money to pay its debts.  If the government is crowding out private investment by borrowing heavily, it can reduce the amount of investment in the economy, which can lead to slower economic growth.

Fiscal Deficit Current figures and target??

  • Finance minister Nirmala Sitharaman’s pre-poll budget sent a strong signal to the market and to rating agencies on how the Indian government will lower its debt level–fiscal deficit is to be cut to 5.1% of gross domestic product in FY25, from 5.9% in FY24.
  • The finance minister also said the fiscal deficit estimate for FY24 has been revised to 5.8% of GDP, from the 5.9% estimated earlier for the financial year. The Union government has managed to limit its fiscal deficit for FY24 in spite of having to moderate the nominal economic growth assumption for the current financial year, as per the first advance estimate released by the statistics ministry in December. 
  • For its fiscal deficit target of 5.1% of GDP for FY25, the government has assumed nominal GDP growth of 10.5% in the financial year. 

Challenges in front of India for achieving the targets??

  • Nirmala Sitharaman in her budget speech for FY22 had said that the government would pursue a broad path of fiscal consolidation to attain a level of fiscal deficit lower than 4.5% of GDP by FY26. But the fiscal deficit shot up to 9.2% in the pandemic year of FY21, twice the level seen in the year before. Global economic headwinds, geopolitical risks and high commodity prices could potentially pose risks to the government’s fiscal math. Global economic headwinds, geopolitical risks and high commodity prices could potentially pose risks to the government’s fiscal math. Significant rises in commodity prices “could lead to some renewed pressure to maintain subsidies that are at a higher level in an election year. The ruling Bharatiya Janata Party faces elections in key states this year and a national vote in 2024.
  • Since taking office in 2014, Prime Minister Narendra Modi has ramped up capital spending including on roads and energy.Still, India continues to have gaps in infrastructure, reducing which should be positive for medium-term growth

How India plans to meet it targets                                

  • The government is seen to be prudent about spending, which instils confidence that it will meet the target of limiting the fiscal deficit to 4.5% of GDP over the next two years. The assurance from the government will help investors’ confidence and also ensure that sovereign yields are range-bound, which is important for financial stability. Besides, a controlled fiscal deficit reduces inflationary pressures and also increases room for private borrowing, thereby crowding in private investment.
  • The Centre’s gross borrowing target for FY24 has been limited to ₹43 trillion, against the budget estimate of ₹17.86 trillion made last February. As of 22 January, the government had raised about ₹14.08 trillion, or about 91% of the FY24 gross market borrowing target. The announcement of the fiscal glide path shows the Centre’s commitment to keeping its debt at sustainable levels to ensure macroeconomic stability, while also leaving adequate legroom for private sector borrowings for stepping up their investments in capacity expansion. As per data from the Controller General of Accounts, the government’s fiscal deficit for the first nine months of the current financial year reached ₹9.82 trillion, which is 55% of the budgeted ₹17.87 trillion for the year. This figure represents a slight improvement from the previous year, where the deficit stood at ₹9.93 trillion or 59.8% of the FY23 budget estimate of ₹16.61 trillion.
  • The use of technology in tax administration, information-driven voluntary compliance, greater formalisation of the economy, expanding the scope of taxes deducted or collected at source, a growing tax base, and economic growth play a key part in the Centre’s fiscal consolidation strategy. 
  • “We continue on the path of fiscal consolidation to reduce the fiscal deficit to below 4.5% during FY2026,” Sitharaman said during her budget speech on Thursday. “The fiscal deficit in 2024-25 is estimated to be 5.1% of GDP, adhering to that path.”
View All