Fiscal deficit is the difference between the government’s total expenditure and its total revenue, excluding borrowings. It indicates the extent to which the government is spending beyond its means and relying on debt to finance its activities. A high fiscal deficit can have adverse effects on the economy, such as inflation, crowding out of private investment, higher interest rates, and lower credit ratings.
The central government of India has set itself a medium-term target of reducing the fiscal deficit to under 4.5 percent of GDP by 2025-26. This is in line with the recommendations of the 15th Finance Commission, which suggested a fiscal consolidation path for the Centre and the states, keeping in view the impact of the COVID-19 pandemic on the public finances.
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However, achieving this target is not an easy task, given the challenges posed by the pandemic, the geopolitical tensions, and the need to boost economic growth and social welfare. The government has to balance its spending priorities with its revenue mobilisation efforts, while also ensuring fiscal prudence and credibility.
According to the data released by the Controller General of Accounts (CGA) on January 31, 2024, the central government’s fiscal deficit widened to Rs 9.82 lakh crore in April-December 2023, from Rs 9.07 lakh crore in April-November 2023. This amounts to 55 percent of the annual budget target of Rs 17.86 lakh crore or 5.9 percent of GDP for 2023-24. The fiscal deficit in the same period of 2022-23 was 59.8 percent of the full-year target.
The increase in the fiscal deficit was mainly due to the higher expenditure incurred by the government to support the economy and the people affected by the pandemic. The total expenditure of the Centre rose by 11.4 percent year-on-year to Rs 23.67 lakh crore in April-December 2023, of which capital expenditure grew by 18.6 percent to Rs 3.77 lakh crore. The government has been focusing on capital expenditure, which has a higher multiplier effect on growth and employment, as compared to revenue expenditure.
Wrapping Up
The government announced its revised estimates of the fiscal deficit and the revenue and expenditure for 2023-24, along with the budget estimates for 2024-25, in the Interim Budget presented by the Finance Minister on February 1, 2024. The market and the rating agencies are closely watching the government’s fiscal stance and the measures taken to achieve the fiscal consolidation path. The government has to strike a fine balance between supporting the economic recovery and maintaining fiscal sustainability in the medium to long term.
