Fiscal deficit targets and performance of government

What’s in today’s article?

• Why in news?
• News Summary: Fiscal deficit targets and performance of government
• What is the direction on fiscal deficit given in the Budget?
• Are allocations lower for some sectors?
• What needs to be done for growth?
• Can the govt. stick to fiscal consolidation?
• What lies ahead?
• Conclusion

 

Why in news?

• In the Union Budget for 2023-24, Government chose the path of relative fiscal prudence.
• It projected a decline in fiscal deficit to 5.9% of gross domestic product (GDP) in FY24, compared with 6.4% in FY23.
  • The fiscal deficit, in mathematical terms, is [total revenue generated — total expenditure]. 
  • It is an indication of the total borrowings needed by the government.

 

News Summary: Fiscal deficit targets and performance of government

• While presenting the Union Budget 2023-24, Union Finance Minister said the government planned to continue on the path of fiscal consolidation.
• It aims to reach a fiscal deficit below 4.5% by 2025-26.

 

What is the direction on fiscal deficit given in the Budget?

 

Image caption: Fiscal deficit roadmap

• In Union Budget 2023-24, the fiscal deficit to GDP is pegged at 5.9% in FY24. 
  • This ratio has declined from 6.4% in 2022-23 (revised estimate) and 6.7% in 2021-22 (actual).
• In Union Budget 2023-24, revenue deficit is 2.9% of GDP.
  • The revenue deficit was 4.1% of GDP in 2022-23 (revised estimate).
• 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.
  • Primary deficit stood at 3% of GDP in 2022-23 (RE).
    • If interest payments are deducted from fiscal deficit, we get primary deficit.

 

Are allocations lower for some sectors?

• As seen from the following figure, the major allocations that have been pared down are food, fertilizer and petroleum subsidies.

Image caption: Subsidy trend

• It is a laudable decision to extend food security to the poor for one more year amid rising inflation. 
• However, rationalisation of subsidies is important so that the government can move towards reaching a fiscal deficit target of 4.5% by 2025-26.

 

What needs to be done for growth?

• Inflation hurts the poor. The interest rate management by the RBI through inflation targeting alone cannot effectively control inflation, given the supply side shocks. 
• Therefore, fiscal policy measures are crucial to tackle mounting inflation. Policy coordination between RBI and North Block is crucial for a sustained growth recovery process.
• The RBI has been increasing policy rates to tackle mounting inflation. But a high interest rate regime can hurt the economic growth process. 
• So, the fiscal policy needs to remain accommodative with focus on gross capital formation in the economy with enhanced capital spending, especially infrastructure investment.
  • Infrastructure investment has a larger multiplier effect on economic growth and employment.
    • In Budget 23-24, capital spending is expected to rise to 3.3% of GDP. 
    • The interest-free loan of ₹1.3 lakh crore for 50 years provided to States should help them spend and boost growth.

 

Can the govt. stick to fiscal consolidation?

• The predominant mode of financing fiscal deficit in India is through internal market borrowings. 
  • It is also to be financed through securities against small savings, provident funds and an insignificant component of external debt. 
• In Union Budget 2023, India’s external debt is pegged at ₹22,118 crore of the total fiscal deficit of ₹17,86,816 crore in 2023-24 (BE), which is approximately about 1%. 
• In Union Budget 2023, it is also stated that the States will have to maintain a fiscal deficit of 3.5% of GSDP of which 0.5% will be tied to power sector reforms.
• There are revenue uncertainties in post-pandemic times and also geopolitical risks, mounting inflation, supply chain disruptions and energy price volatility.
• Despite all this, it can be said that the Government has kept the fiscal policy accommodative and has undertaken capital spending to support economic growth recovery.
• In doing so, it has not deviated from the path of fiscal consolidation.

 

What lies ahead?

• The Finance Minister is focusing on economic growth recovery through capex. She contends that infrastructure investment will boost private investment. 
• In the fiscal deficit-GDP ratio, if the denominator GDP expands, it will reduce the overall fiscal deficit-GDP ratio. Her focus is on economic growth recovery to strengthen GDP.

 

Conclusion

• The Union Budget has a dual focus on growth and fiscal consolidation. 
• In other words, the government has tried to do a Goldilocks on the fiscal deficit - not too much consolidation, nor leave everything related to consolidation for the future.

 

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Q1) What is fiscal consolidation?

Fiscal consolidation is defined as concrete policies aimed at reducing government deficits and debt accumulation. These consolidation plans and detailed measures are given as a per cent of nominal GDP. All measures are quantified to the extent possible.

 

Q2) What is fiscal deficit?

The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings needed by the government.

 

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Source: Explained | Is the government on track on fiscal deficit targets?  |  Economic Times  |  Business Standard