The Union Budget for 2023-24 adopted a fiscal prudence approach, foreseeing a decline in India’s fiscal deficit to 5.9% of the Gross Domestic Product (GDP) in FY24, down from 6.4% in FY23. The fiscal consolidation path set by the government aspires to bring down the fiscal deficit below 4.5% by 2025-26.
Revenue vs. Primary Deficit: A Snapshot
Revised estimates for 2022-23 reveal a revenue deficit of 4.1% of GDP, while this figure is projected at 2.9% of GDP for 2023-24. The primary deficit — referring to the fiscal deficit without including interest payments — was at 3% of GDP in 2022-23, and is pegged at a lower 2.3% of GDP for 2023-24.
Moving towards Fiscal Consolidation: Key Steps
In a bid to consolidate fiscally, the government has undertaken several key measures. These include reducing subsidies related to food, fertilizers, and petroleum, increasing capital expenditure, and managing debt optimally.
Reduced Subsidies: An Overview
The government reduced the allocation for food, fertilizer, and petroleum subsidies. For instance, the food subsidy amount decreased from ₹2,87,194 crore in 2022-23 to ₹1,97,350 crore in 2023-24. The fertilizer subsidy witnessed a drop from ₹2,25,220 crore to ₹1,75,100 crore during the same period, while petroleum subsidies fell to ₹2,257 crore in 2023-24 from ₹9,171 crore.
Capital Expenditure: A Key Focus Area
The government has planned a rise in capital spending to 3.3% of GDP in the 2023-24 budget, offering an interest-free loan of ₹1.3 lakh crore for 50 years to states as a growth stimulus.
Debt Management: A Responsible Approach
The bulk of the fiscal deficit is financed through internal market borrowings, with securities against savings, provident funds, and external debt contributions forming a smaller part. As per the 2023 Union Budget, India’s external debt stands at ₹22,118 crore, a mere 1% of the total fiscal deficit.
Fiscal Consolidation: Its Importance for Emerging Economies
Fiscal consolidation, which involves narrowing down the fiscal deficit, is crucial for emerging economies. Government borrowing to cover the deficit requires a chunk of its revenue to be allocated towards servicing the debt, increasing the interest burden proportionately as the debt grows.
Understanding Fiscal Deficit: An Overview
Fiscal deficit represents the gap between the government’s total expenditure and its total revenue, excluding borrowings. It serves as a measure of the extent of government borrowing required to fund its operations and is expressed as a percentage of the country’s GDP.
Positive Impacts of Fiscal Deficit: Opportunities and Advantages
A fiscal deficit allows the government to augment spending on public services and infrastructure, thereby stimulating economic growth. It offers a way to finance long-term investments such as infrastructure projects and can lead to job creation, improving the standard of living.
Negative Aspects of Fiscal Deficit: Challenges and Concerns
A sustained high fiscal deficit results in an increased government debt burden and could lead to inflationary pressures. It could also discourage private investment by making credit access difficult due to high-interest rates resulting from heavy government borrowing. Moreover, borrowing from foreign sources could potentially pressure the balance of payments and deplete foreign exchange reserves.
Other Deficit Types: Revenue, Primary, and Effective Revenue Deficits
In addition to the fiscal deficit, other types of deficits include revenue deficit, primary deficit, and effective revenue deficit. While the revenue deficit refers to an excess of government expenditure over revenue receipts, the primary deficit — calculated as fiscal deficit minus interest payments — indicates the gap between the government’s expenditure requirements and its receipts, without considering prior years’ loan interest payments. The effective revenue deficit, proposed by the Rangarajan Committee on Public Expenditure, is the difference between revenue deficit and grants designated for capital asset creation.
Conclusion: The Way Forward
For India, the priority is economic recovery through increased capital expenditure. By boosting government investments in infrastructure, private investment is expected to rise, thereby fueling GDP growth and reducing the ratio of fiscal deficit to GDP concurrently.