Fiscal Deficit

• Context (TH): It was announced in the interim Budget that the Centre would reduce its fiscal deficit to 5.1% of gross domestic product (GDP) for the year 2024-25 & less than 4.5% of GDP by 2025-26.
• The revised estimates (for 2023-24) also lowered the fiscal deficit projection to 5.8% of GDP.
• These announcements have surprised many, as most were anticipating a higher fiscal deficit target.

Fiscal Deficit vs National Debt

• Fiscal deficit refers to the shortfall in a government’s revenue when compared to its expenditure.
• For example, in 2024-25, the government’s total revenue is estimated to be ₹30.8 lakh crore whereas the total expenditure is estimated to be ₹47.66 lakh crore.
• Please note, the borrowings that form part of the revenue should not be included.

Fiscal Deficit = Total Expenditure – (Total Revenue – Borrowings) Fiscal Deficit = Budget Deficit + Borrowing

• The fiscal deficit should not be confused with the national debt.
• The national debt is usually the amount of debt that a government has accumulated over many years of running fiscal deficits and borrowing to bridge the deficits.

The national debt stands at 81.9% of GDP (as of Nov 2023).

How does the government fund its fiscal deficit?

• To fund its fiscal deficit, the government mainly borrows money from the bond market.

Bond market The bond market is often referred to as the debt market, or credit market. It is the collective name given to all trades and issues of debt securities. It is divided into two categories: primary and secondary bond market. Primary markets are markets in which issuers first sell bonds to investors to raise capital. Secondary markets are markets in which existing bonds are subsequently traded among investors. RBI is a major player in the secondary market as it purchases government bonds from private lenders who have already purchased bonds from the government. (Open market operations).

Why does the fiscal deficit matter?

• Fiscal deficit ∝ to Inflation: There is a strong direct relationship between the government’s fiscal deficit and inflation in the country.
• Reduce borrowing cost: Fiscal deficit (FD) is indicative of fiscal discipline upheld by the government. The less the FD, the more the confidence to lenders and drives down the government’s borrowing cost.
• Managing public debt: A high fiscal deficit can also adversely affect the ability of the government to manage its overall public debt.
• Access to international bond market. A lower fiscal deficit may help the government to sell its bonds overseas more easily and access cheaper credit.

In December, the International Monetary Fund warned that India’s public debt could rise to more than 100% of GDP in the medium term although the Centre disagreed with the assessment.

How is the government planning to bring down the fiscal deficit for 2024-25?

• Raise the tax base, tax collection and reduce spending.
  • The Centre expects tax collections to rise by 11.5% in 2024-25.
  • Spending less on fertilizer subsidy, from ₹1.88 lakh crore (2023-24) to ₹1.64 lakh crore (2024-25).
  • Reducing food subsidy from ₹2.12 lakh crore (2023-24) to ₹2.05 lakh crore (2024-25).