Fiscal deficit represents the gap between government’s total expenditure and revenue (excluding borrowings), indicating the amount of borrowing needed to meet expenses. In FY2023-24, India’s fiscal deficit stood at 5.6% of GDP, lower than the targeted 5.8%, demonstrating improved fiscal management.

Components and Calculation of Fiscal Deficit

• Revenue Components: Tax receipts (direct and indirect), non-tax revenue (PSU dividends, disinvestment proceeds), and non-debt capital receipts.
• Expenditure Components: Revenue expenditure (salaries, subsidies) and capital expenditure (infrastructure development, asset creation).
• Calculation Method: Total Expenditure – (Revenue Receipts + Non-debt Capital Receipts).

Importance of Controlling Fiscal Deficit

• Macroeconomic Stability
  • Inflation Control: High fiscal deficit leads to increased money supply and inflationary pressures.
  • Interest Rates: Large government borrowings crowd out private investment and push up interest rates.
  • Credit Rating Impact: As per S&P Global Ratings, reducing fiscal deficit to 4% of GDP could lead to India’s sovereign rating upgrade.
• External Sector Management
  • Current Account Balance: High fiscal deficit often leads to twin deficit problem, affecting external trade balance.
  • Currency Stability: Excessive deficit can lead to rupee depreciation and external sector vulnerabilities.
• Debt Sustainability
  • Government’s Target: Aims to reduce debt-to-GDP ratio to 50% by March 2031.
  • Rating Agency Assessment: Fitch Ratings maintains India’s ‘BBB-‘ rating, citing high deficits as credit weakness.
• Growth and Development
  • Capital Expenditure: In FY2023-24, capex reached 99.9% of revised estimates (Rs. 9.5 lakh crore), showing focus on productive spending.
  • Social Sector Spending: Controlled deficit ensures sustained welfare spending without compromising fiscal health.

The government’s commitment to fiscal consolidation is evident in its roadmap to reduce fiscal deficit to 4.4% by FY26. This balanced approach focuses on productive expenditure while maintaining fiscal discipline, crucial for India’s sustained economic growth and development.