Stick to fiscal deficit as the norm for fiscal prudence

Sub: Eco

Sec : Fiscal Policy

Fiscal deficit target:

Finance Minister in the Budget speech said that the Centre’s fiscal deficit would be reduced to 5% of GDP in 2025-26 from its budgeted level of 4.9% in 2024-25.
Also, Centre’s debt-GDP ratio is estimated at 54% in 2025-26, assuming a nominal GDP growth of 10.5% in these two years.

Shift in target:

After 2026, the central government aims to have only a reducing path of debt-GDP ratio without stating a debt-GDP target and specifying a path to reach that.
This implies an effective abandoning of the Centre’s Fiscal Responsibility and Budget Management (FRBM) 2018 targets for an indefinite period.
The act set a debt-GDP target of 40% for the central government and 60% for the combined government.

Fiscal deficit:

It is the gap between the government’s expenditure requirements and its receipts. This equals the money the government needs to borrow during the year.
Fiscal Deficit= Total Expenditure- Total Receipts (excluding borrowings)
It indicates the total borrowing requirements of the government from all sources.

FRBM targets:

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, was enacted to bring transparency and accountability in the conduct of the fiscal and monetary actions of the government.
The rules set targets for the phased reduction of the fiscal deficit to acceptable levels.
It requires the government to limit the fiscal deficit to 3% of the GDP by 31 March 2021 and the debt of the central government to 40% of the GDP by 2024-25, among others.
The Act provides room for deviation from the annual fiscal deficit target under certain conditions.

Sustainable debt:

To reduce the debt-GDP ratio, first India has to reduce fiscal deficit-GDP ratio.
Thus, India needs to focus on fiscal deficit reduction for fiscal prudence and sustainable debt management.

International comparison:

There are many countries which have a far higher level of government debt-GDP ratio as compared to India. Their interest payments to revenue receipts, however, are much lower.
During 2015-16 to 2019-20, India’s interest payment to revenue receipts ratio was 24%.
This is much higher compared to Japan (5.5%) and United States.