Fiscal Deficit Target for FY25

Context:

According to the experts, the Budget 2024-25 lowers fiscal deficit target to boost the investor Confidence. The government has set its fiscal deficit target for FY25 at 5.1% of GDP.

Relevance:

GS-3 Indian Economy

Dimensions of the Article:

1. Fiscal deficit target for FY25
2. What is fiscal deficit?

Fiscal deficit target for FY25:

• The Indian government will lower its debt level and the fiscal deficit is to be cut to 5.1% of gross domestic product in FY25, from 5.9% in FY24.
• The finance minister also said the fiscal deficit estimate for FY24 has been revised to 5.8% of GDP, from the 5.9% estimated earlier for the financial year.
• Boost Investments:
  • The assurance from the government will help investors’ confidence.
  • It will improve fiscal stability as the move will ensure that sovereign yields are range-bound.

   Centre’s fiscal consolidation strategy:

• The use of technology in tax administration
  • Information-driven voluntary compliance,
  • Greater formalisation of the economy,
  • Expanding the scope of taxes deducted or collected at source,
  • Growing tax base, and economic growth

What is fiscal deficit?

• It is the difference between the Revenue Receipts plus Non-debt Capital Receipts (NDCR) and the total expenditure.
• In other words, fiscal deficit is a result of the government’s total expenditures exceeding the revenue that it generates, excluding money from borrowings.
• A significant fiscal deficit can lead to a higher national debt and increased costs related to debt servicing.
  • This can adversely affect the economy, potentially devaluing the national currency and hindering private sector investments.

What is the significance of fiscal deficit?

• In the economy, there is a limited pool of investible savings. These savings are used by financial institutions like banks to lend to private businesses (both big and small) and the governments (Centre and state).
• If the fiscal deficit ratio is too high, it implies that there is a lesser amount of money left in the market for private entrepreneurs and businesses to borrow.
• Lesser amount of this money, in turn, leads to higher rates of interest charged on such lending.
• So, simply put, a higher fiscal deficit means higher borrowing by the government, which, in turn, mean higher interest rates in the economy.
• A high fiscal deficit and higher interest rates would also mean that the efforts of the Reserve Bank of India to reduce interest rates are undone.

-Source: Livemint