Syllabus: GS3/Economy
Context
- The Economic Survey 2025-26 has argued in favour of a delay in strict fiscal targets for the Centre, such as those that had been set under the Fiscal Responsibility and Budget Management Act.
Highlights of survey on Fiscal Targets
- After spiking to 9.2% of GDP during the pandemic year of 2020-21, the Centre’s fiscal deficit was on target to be 4.4% at the end of the current financial year, in line with commitment to halve the FY21 fiscal deficit in five years.
- India lowered its general government debt-to-GDP ratio by about 7.1 percentage points since 2020 while continuing to maintain high levels of public investment
- The FRBM Act’s fiscal deficit target of 3% of GDP by March 2021 has been repeatedly deferred by the government, and the Survey acknowledged that there is a “perception” that this target and framework must be reinstated.
- Since the FRBM Act was first enacted in 2003, the 3% target has been achieved only once.
- In her last Budget, the Finance Minister had specified a new fiscal framework, under which the Centre would target bringing down its debt-to-GDP ratio to 50% with a 1% leeway above and below by March 31, 2031.
- The Survey has argued, it is the appropriate strategy for now, and can be revisited after this time period is over.
- Once this target is met, and the fiscal deficit declines gradually, then a new FRBM target could be considered.
- State finances deteriorating: While praising the Centre for its fiscal prudence, the Survey however cautioned State governments against worsening finances.
| The Fiscal Responsibility and Budget Management Act, 2003 – The Fiscal Responsibility and Budget Management Act, 2003, was enacted with a view to provide a legislative framework for reduction of deficit of the Central Government to a sustainable level over a medium term. – The rules made under the Act came into force from 2004. – It mandates the Central Government to limit the Fiscal Deficit upto 3% of Gross Domestic Product by 31st March, 2021. – It further provides that the Central Government shall endeavour to limit the General Government Debt to 60% of GDP and the Central Government Debt to 40% of GDP, by 31st March, 2025. |
What is the fiscal deficit?
- Fiscal Deficit is defined as excess of total budget expenditure (revenue and capital) over total budget receipts (revenue and capital) excluding borrowings during a fiscal year.
- Fiscal Deficit = Total Expenditure – (Revenue Receipts + Non-Debt Creating Capital Receipts).
Implications of fiscal deficit
- Inflationary Pressure: Persistently high fiscal deficits lead to inflation as governments resort to central bank-issued money to finance the deficit.
- Crowding Out effect: When the government borrows a large portion of available funds from financial markets to finance its deficit, it crowds out private investment with reduced access to credit for businesses and individuals.
- Reduced Fiscal Space: A high fiscal deficit limits the government’s ability to respond to economic shocks or crises.
- Difficulty in borrowing: As a government’s finances worsen, demand for the government’s bonds begins to drop, forcing the government to offer to pay a higher interest rate to lenders.
Benefits of lower fiscal deficit
- Improved Credit Ratings: Consistent deficit reduction enhances international credit ratings, lowering borrowing costs in global markets.
- Reduced Debt Servicing: Less spending on interest payments frees funds for development projects like infrastructure, education, and healthcare.
- Improved Balance of Payments: Lower reliance on foreign borrowing stabilizes the exchange rate and current account.
- Enhanced Investor Confidence: Signals fiscal discipline, attracting greater foreign and domestic investments.
| NK Singh committee recommendation (2016) – Debt to GDP ratio: The Committee suggested using debt as the primary target for fiscal policy. A debt to GDP ratio of 60% should be targeted with a 40% limit for the center and 20% limit for the states by FY23. – The fiscal deficit to GDP ratio of 2.5% by FY23. – Fiscal Council: The Committee proposed to create an autonomous Fiscal Council with a Chairperson and two members appointed by the center. The role of the Council would include: a. Preparing multi-year fiscal forecasts, b. Recommending changes to the fiscal strategy, c. Improving quality of fiscal data, d. Advising the government if conditions exist to deviate from the fiscal target. – Deviations: The Committee suggested that grounds in which the government can deviate from the targets should be clearly specified, and the government should not be allowed to notify other circumstances. |
Source: TH
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