In the news

• Capital Expenditure Decline: In January, the Centre’s capital expenditure saw a significant decline of 40.5%, totaling ₹47,600 crore compared to ₹80,000 crore in the previous year.
• Fiscal Deficit Widening: By the end of January, the fiscal deficit reached 64% of the revised estimates for 2023-24. Despite challenges in expenditure, the government seems poised to meet the revised deficit target of 5.8% of GDP for the year.

What is Fiscal Deficit?

• Definition: Fiscal deficit is the excess of total disbursements from the Consolidated Fund of India over total receipts, excluding debt repayment, within a financial year.
• Formula: Fiscal Deficit = Total expenditure of the government (capital and revenue expenditure) – Total income of the government (Revenue receipts + recovery of loans + other receipts).

Reasons behind Fiscal Deficit

[1] Fall in Income

• Lower tax collection: Economic slowdown, tax evasion, and GST implementation issues.
• Impact of economic sectors shut during the pandemic: Closure of economic activities leading to decreased tax revenues.
• Government’s missed disinvestment targets: Failure to achieve disinvestment targets resulting in lower capital receipts.

[2] Rise in Expenditure

• Factors contributing to high inflation: High inflation rates increasing import and borrowing costs.
• Importance of social infrastructure investment: Emphasis on social infrastructure for inclusive growth and employment.
• External market volatilities affecting Indian expenditure: Dependency on imports exposing India to external market fluctuations.
• Unproductive expenditures like subsidies: Essential but unproductive expenditures adding to fiscal pressure.

[3] Rise in Borrowings

• Need for market borrowing for policy implementations: Borrowing for policy measures such as bank recapitalization, farm loan waivers, and UDAY.

Implications of Fiscal Deficit

• Vicious circle of borrowing and repayment: Continuous borrowing to repay loans leading to a debt trap.
• Inflation: Increased borrowing leading to higher interest rates and inflation.
• Reduced private sector borrowing: Government borrowing reducing borrowing opportunities for the private sector.
• Discouragement of private investment: Inflation and limited financing discouraging private investment.
• Risk of credit rating downgrade: High borrowing increasing the risk of credit rating downgrade.
• Limits Revenue Spending: Rising fiscal deficit affecting government allowances like dearness allowance and dearness relief.
• Foreign Dependence: Borrowing from foreign sources increasing dependence and exposure to external fiscal policies.

Measures for Control: FRBM Act, 2003

• The FRBM Act aims to instil fiscal discipline and ensure inter-generational equity in fiscal management, promoting long-term macro-economic stability.
• Targets:
  1. Limit fiscal deficit to 3% of GDP by March 31, 2009.
  2. Completely eliminate revenue deficit.
  3. Reduce liabilities to 50% of estimated GDP by 2011.
  4. Prohibit direct borrowing from RBI to monetize the deficit.
• Escape Clause: Section 4(2) of the Act allows the Centre to exceed annual fiscal deficit targets under specific circumstances, such as national security, calamity, agricultural collapse, or structural reforms.
• Review Committee: In May 2016, a committee under NK Singh was formed to review the FRBM Act. Recommendations included targeting a fiscal deficit of 3% of GDP until March 31, 2020, reducing it to 2.8% in 2020-21, and further to 2.5% by 2023.
• Current Targets:
  1. The latest provisions of the FRBM Act mandate limiting fiscal deficit to 3% of GDP by March 31, 2021.
  2. Central government debt should not exceed 40% of GDP by 2024-25, among other stipulations.

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