Context: In the Union Budget for 2023-24, the Finance Minister projected a decline in fiscal deficit to 5.9% of gross domestic product (GDP) in FY24 from 6.4% in FY23.
About Fiscal Deficit
- Fiscal deficit is the gap between the total expenditure and total income of the government.
- Fiscal Deficit = Government Revenue – Government Expenditure
- It indicates the extent by which government spending exceeds its income and the total borrowings needed by it to fill this gap.
- The government experiences a fiscal deficit when it spends more money than it takes in from taxes and other revenues.
- It is usually calculated and expressed as a percentage of a country’s Gross Domestic Product (GDP).
- Significance of Fiscal deficits: It can boost a sluggish economy by increasing the spending power of people for investment.
Budget FY2024 and Fiscal Deficit
- In Union Budget 2023, the Fiscal deficit is estimated to be 5.9% of GDP.
- States will have to maintain a fiscal deficit of 3.5% of GSDP of which 0.5% will be tied to power sector reforms.
- Target: To reach a fiscal deficit below 4.5% by 2025-26.
Financing of Fiscal Deficit in 2023-24
- Gross market borrowings are estimated at Rs 15.4 lakh crore. Net market borrowings from dated securities are estimated at Rs 11.8 lakh crore, while remaining from small savings and other sources.
- Rationalisation of subsidies
- Food subsidy reduced to Rs 1,97,350 crore in 2023-24 from Rs 2,87,194 crore in 2023-24, 2022-23 (RE).
- Fertilizer subsidy reduced to Rs 1,75,100 crore for FY24 from Rs 2,25,220 crore (RE) Rs 1,75,100 crore for FY24.
- Petroleum subsidy in 2022-23 was Rs 9,171 crore (RE); it has been reduced to Rs 2,257 crore in 2023-24.
Causes of Fiscal Deficit
- Increased Government Spending: When a government increases spending on programs or initiatives, it can lead to a higher deficit if revenue does not grow at the same rate.
- Lower Revenue: A decrease in revenue, such as a decline in tax revenues or a reduction in revenue from natural resources, can also contribute to a higher deficit.
- Economic Downturns: During an economic recession, government revenues may decrease while expenses increase, leading to a higher deficit.
- War or Natural Disasters: The costs of war or natural disasters can also contribute to a higher deficit as the government may need to increase spending to address these issues.
- Social Welfare: A country that has many social welfare programs running and is expensive to run may also cause a higher deficit.
- Interest on Debt: A government may also have to pay a significant amount of money in interest on its debt, which can also contribute to a higher deficit.
Disadvantage of Fiscal Deficit
- In the long term, a high level of debt is associated with slower growth.
- Huge deficits are seen in a largely negative light by international rating agencies and economy watchers.
- High borrowings could distort interest rates in the economy.
- Vicious Cycle of Debt: Persistent deficits increase government debt and take away a large portion of its revenues towards interest payouts.
- Inflationary Pressure: Printing fresh currency leads to the inflow of an additional quantity of money in the economy. Deficit financing can lead to inflation, that is, a rise in the prices of all commodities.
- Excessive dependence of a country on debt can hamper economic growth in the long term.
- High deficit could result in less money to invest in development and job creation.
- Tame Inflation: Fiscal policy measures are crucial to tackle mounting inflation as interest rate management by the RBI through inflation targeting alone cannot effectively control inflation.
- Policy coordination between RBI and Government is crucial for a sustained growth recovery process.
- Fiscal Prudence: Fiscal deficit estimates lower at 5.9% helps the market gain greater confidence in the continuing fiscal prudence.
- Adherence to FRBM Act: Fiscal Responsibility and Budget Management (FRBM) Act, 2003 requires the central government to progressively reduce its outstanding debt, revenue deficit and fiscal deficit, and give three year rolling targets.
- Government’s aim to reduce fiscal deficit to below 4.5% of GDP by 2025-26.