Fiscal Consolidation in India, Meaning, Examples

Context: The Indian interim budget for 2024-25 presented a cautious approach, highlighting continued focus on capital expenditure and fiscal consolidation while avoiding major tax changes.

Fiscal Consolidation

• The Budget projects a fiscal deficit reduction to 5.1% for 2024-25, aligning with the goal of achieving a fiscal deficit of 3% of GDP for the Central government and 6% for combined Central and State governments.
  • This target considers household savings and resource inflows, aiming to manage the debt-to-GDP ratio effectively and control inflation.
• However, achieving a 3% fiscal deficit for the central government, a key recommendation from experts, remains a distant goal. The logic behind this target and its feasibility in the current economic climate needs further exploration.
• The committee reviewing the Fiscal Responsibility and Budget Management (FRBM) Act proposed a combined Centre-State debt-GDP ratio of 60% and a 40% target for the Centre. The rationale for these specific numbers and their compatibility with the 3% fiscal deficit goal requires deeper understanding.

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Understanding Fiscal Deficit

• Definition: Fiscal deficit occurs when a government’s total expenditures surpass its total revenues, excluding borrowing. It indicates the amount by which a government needs to borrow or sell assets to cover its spending.
• Fiscal Management Focus: Governments generally prioritise managing and containing the fiscal deficit over achieving a fiscal surplus or a balanced budget.
  • This approach is due to the expansionary nature of a controlled deficit policy, which involves increased spending on sectors like infrastructure to stimulate productivity and economic growth.

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