Syllabus: GS3/ Economy
Context
- The Government of India has successfully met its fiscal deficit target of 4.8% of GDP for the financial year 2024-25, as per provisional data released by the Controller General of Accounts (CGA).
Key Highlights of the FY25 Fiscal Performance
- In 2024–25, the Government of India recorded a fiscal deficit of ₹15.77 lakh crore, which amounted to 4.8% of the GDP, in line with its revised estimates.
- The central government’s total revenue stood at ₹30.78 lakh crore.
- Net tax revenue amounted to ₹24.99 lakh crore, which was 97.7% of the government’s target.
- The government earned ₹10,131 crore from disinvestment of public sector undertakings in 2024–25.
- This contributed to the miscellaneous capital receipts but remained far below the target.
- Total government expenditure stood at ₹46.55 lakh crore, which was 97.8% of the revised estimate.
- Capital expenditure, which refers to spending on long-term assets like infrastructure, reached ₹10.52 lakh crore.
- Revenue expenditure stood at ₹36.03 lakh crore.
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 – 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: 1. Preparing multi-year fiscal forecasts, 2. Recommending changes to the fiscal strategy, 3. Improving quality of fiscal data, 4. 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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