The release of the Budget 2024 has brought fiscal deficit targets into sharp focus. Fiscal deficits are pivotal in understanding the government's commitment to fiscal discipline while addressing the pressing needs of development, infrastructure, and social welfare. In this blog, we’ll uncover ‘what is fiscal deficit?’ and look at the stance of the Union Budget 2024 over fiscal deficit in 2024-25.
What is fiscal deficit?
Simply put, a fiscal deficit occurs when a government's total expenditures exceed its revenues, excluding funds obtained through borrowing. It reflects the extent to which a government is spending more than it's earning within a fiscal year. Typically, fiscal deficit is represented as a percentage of a country’s Gross Domestic Product (GDP).
A high fiscal deficit may indicate that a government is overspending relative to its revenue, potentially leading to increased public debt if borrowing is used to cover the deficit. Remember though that a certain level of deficit spending can be strategic, particularly during economic downturns, where increased government expenditure (financed through borrowing) can stimulate economic growth.
Nevertheless, persistent and substantial fiscal deficits can give rise to economic challenges, including inflation, higher interest rates, and a growing debt burden on future generations.
Components of fiscal deficit
The components of fiscal deficit can be broadly classified into two primary categories; let's delve into a detailed breakdown:
Government revenues
These encompass funds collected by the government, mainly through:
Tax revenues: This category encompasses direct taxes (such as income tax and corporate tax) and indirect taxes (including goods and services tax, sales tax, and excise duty).
Non-tax revenues: These revenues originate from sources other than taxes, such as profits derived from public sector enterprises, fees, fines, and royalties.
Government expenditures
This denotes the financial outlays made by the government across various domains, including:
Capital expenditures: This encompasses expenditures on infrastructure, buildings, healthcare facilities, and equipment, which yield long-term economic benefits.
Current expenditures: These expenses encompass day-to-day operational costs, including government employee salaries, subsidies, social security benefits, interest payments on debt, and infrastructure maintenance.
Fiscal deficit in India: a History
Over the past decade, fiscal deficit in India has seen considerable fluctuation, influenced by various economic policies and global events.
India's fiscal management is primarily guided by the Fiscal Responsibility and Budget Management Act (FRBM). The FRBM Act aimed to limit the central government's fiscal deficit to 3% of GDP and achieve a balanced revenue budget by the end of 2008-09. However, the actual outcomes have diverged from these targets.
Let’s look at India’s fiscal journey:
The past decade has seen periods of modest fiscal deficits, followed by significant expansions due to increased government spending, economic downturns, and emergencies such as the global financial crisis of 2008 and the COVID-19 pandemic in 2020.
Stimulus measures and increased public spending in response to these crises markedly widening the fiscal deficit.
The introduction of the GST in 2017 aimed to streamline taxation and enhance revenue collection, but the desired fiscal consolidation faced challenges from subsidy burdens and weak tax revenues.
Despite these challenges, efforts at fiscal consolidation have been noted. State governments reduced their fiscal deficit between 2003-04 and 2007-08.
The historical pattern of fiscal management in India highlights the ongoing struggle to maintain this balance in the face of political, economic, and social pressures.
Budget 2024: fiscal deficit in 2024-25
Source | Fiscal deficit target 2024-25
During her Budget 2024 speech on February 1, Finance Minister Nirmala Sitharaman revealed that the government anticipates the fiscal deficit in 2024-25 to be 5.1 % of GDP for FY25.
To cover this deficit in FY25, the government plans to borrow Rs.14.13 and Rs.11.75 lakh crore through dated securities, which is less than the borrowings in FY24.
Sitharaman emphasised the government's commitment to fiscal consolidation, aiming to reduce the deficit below 4.5 % by 2025-26.
She mentioned that for 2024-25, total receipts (excluding borrowings) and total expenditure are estimated at Rs. 30.80 and Rs.47.66 lakh crore, respectively, with tax receipts expected to be Rs.26.02 lakh crore.
Despite increased government spending to boost the economy, the fiscal deficit decreased due to higher tax receipts and non-tax revenue. In the first nine months of FY24, the fiscal deficit was at Rs.9.82 trillion, constituting 55% of the annual estimate. Total receipts during this period were Rs.20.72 trillion, with tax receipts at Rs.17.30 trillion and non-tax revenue at Rs.3.12 trillion.
Total expenditure rose to Rs.30.54 trillion, accounting for 67.8% of the annual estimate.
India's fiscal deficit in 2024-25 has decreased since FY21, reaching 6.4% in FY23 from 9.2 % in FY21 due to COVID-related expenditure. Sitharaman aimed to narrow the fiscal deficit to 5.9 % of GDP in FY24 in her previous Budget speech and has now revised the target to 5.8% of GDP.
Implications of fiscal deficit target 2024-25
The government with a fiscal deficit target of 5.1% of GDP for FY 2024-25, aims for fiscal consolidation while also boosting capital expenditure by 11% to Rs.11.11 trillion.
Additionally, the Budget highlights include maintaining tax stability, enhancing capital expenditure for growth support, and a gradual approach towards meeting the FRBM target of a 3% fiscal deficit, which is expected to take several years.
The implications of fiscal deficit in 2024-25 include:
Increased government borrowing: Fiscal deficit often leads to increased borrowing by the government from domestic and international sources.
Higher debt levels: Persistent fiscal deficits can result in a higher national debt burden over time.
Impact on interest rates: High fiscal deficits may lead to higher interest rates as the government competes with private borrowers for funds.
Potential inflationary pressures: If the fiscal deficit is financed by the central bank printing money, it can lead to inflationary pressures in the economy.
Crowding out private investment: High government borrowing can crowd out private investment by absorbing available funds in the financial markets.
Credit rating implications: Persistent fiscal deficits can negatively impact a country's credit rating, making it more expensive to borrow in the future.
Economic instability: Unsustainable fiscal deficits can lead to economic instability and uncertainty about future government policies.
Clearly, managing the fiscal deficit is a crucial aspect of a country's economic policy and financial stability. The Interim Budget 2024 is designed to maintain India's growth momentum while carefully managing the fiscal deficit in 2024-25, indicating a prudent fiscal approach ahead of the general elections and amid global economic uncertainties.
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FAQs
How to calculate fiscal deficit?
To calculate fiscal deficit, subtract a government's total expenditure from its revenue for a specific period, usually a fiscal year.
Is fiscal deficit good or bad?
The fiscal deficit can be seen as both good and bad depending on the context. It's generally considered bad when it's too high and leads to unsustainable debt levels, but it can be good when used to stimulate economic growth or invest in long-term development.
