Is Govt. on track with fiscal deficit targets?

GS Paper 3

Syllabus: Government Budgeting

Source: TH 

Direction: The article highlights how the Union Budget 2023-24 has tried to achieve fiscal consolidation on one hand and economic recovery on another.

Context:

• In the Union Budget for 2023-24, the Finance Minister chose the path of relative fiscal prudence and projected a decline in fiscal deficit to 5.9% of GDP in FY24, compared with 6.4% in FY23.
• The government is planning to continue on the path of fiscal consolidation (reducing deficits) and reach a fiscal deficit below 4.5% by 2025-26.

The Union Budget 2023-24:

 Different deficits:

• The fiscal deficit (FD) is pegged at 5.9% of GDP in FY24, down from 6.4% in 2022-23 (Revised Estimates – RE) and 6.7% in 2021-22 (actual).
  • To finance the FD in 2023-24, the net market borrowings from dated securities are estimated at ₹11.8 lakh crore.
  • The balance financing is expected to come from small savings and other sources and gross market borrowings are estimated at ₹15.4 lakh crore.
  • It is also stated that the states will have to maintain a fiscal deficit of 3.5% of GSDP of which 0.5% will be tied to power sector reforms.
• The revenue deficit is pegged at 2.9% of GDP, down from 4.1% of GDP in 2022-23 (RE).
• The primary deficit is pegged at 2.3% of GDP, down from 3% of GDP in 2022-23 (RE).

External debt: India’s external debt is pegged at ₹22,118 crore of the total fiscal deficit of ₹17,86,816 crore in 2023-24 (Budget estimate – BE), which is approximately about 1%.

Fiscal consolidation – Lowering food, fertiliser and petroleum subsidies:

• The food subsidy has been reduced to ₹1,97,350 crore (BE) (from ₹2,87,194 crore in 2022-23 (RE)).
• The fertiliser subsidy has been reduced to ₹1,75,100 crore for FY24 (from ₹2,25,220 crore (RE)).
• The petroleum subsidy has declined to ₹2,257 crore in 2023-24 (from ₹9,171 crore (RE)).
• The rationalisation of subsidies is important so that the government can move towards reaching a fiscal deficit target of 4.5% by 2025-26.

What needs to be done for reviving growth?

• Inflation targeting alone is not sufficient: Given the supply-side shocks, the RBI’s interest rate management through inflation targeting is insufficient to successfully control inflation.
  • Also, a high-interest rate regime can hurt the economic growth process.
  • Therefore, fiscal policy measures are crucial to tackling mounting inflation.
• Fiscal policy needs to remain “accommodative”:
  • This will go along with a focus on gross capital formation in the economy with enhanced capital spending, especially infrastructure investment.
  • In Budget 23-24, capital spending is expected to rise to 3.3% of GDP.
  • Infrastructure investment has a larger multiplier effect on economic growth and employment.
  • The interest-free loan of ₹1.3 lakh crore for 50 years provided to States should help them spend and boost growth.
• Policy coordination: Between RBI and the govt. is crucial for a sustained growth recovery process.

Can the govt. stick to fiscal consolidation?

• According to Moody, the ambitious goal to reduce the deficit to 4.5% of GDP by FY26 is unlikely to be met, even when ongoing-gradual fiscal consolidation helps to stabilise the government’s debt burden and protects credit quality.
• According to Fitch Ratings, the slow fiscal consolidation process in the wake of the pandemic could leave public finances exposed in the event of further major economic shocks – geopolitical risks, mounting inflation, energy price volatility, etc.

What lies ahead?

• The Finance Minister is focusing on economic growth recovery through capex, as the infrastructure investment will boost private investment.
• In the fiscal deficit-GDP ratio, if the denominator GDP expands, it will reduce the overall fiscal deficit-GDP ratio.
• So the government is trying to maintain a Goldilocks balance (whereby the economy is not expanding/contracting by too much) between fiscal consolidation (reducing deficits) and economic growth recovery.

Insta Links:

• Union Budget 2023-24
• A budget that signals growth with stability

Mains Links:

Q. What were the reasons for the introduction of the Fiscal Responsibility and Budget Management (FRBM) Act, 2013? Discuss critically its salient features and their effectiveness. (UPSC 2013)

Prelims Links: (UPSC 2021)