Stick to fiscal deficit as the norm for fiscal prudence
- September 7, 2024
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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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.