Government Budgets

Why is Fiscal Consolidation So Important?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Fiscal Deficit

Mains level : Not Much

Introduction

  • In her Budget speech, FM revealed the government’s plans to reduce the fiscal deficit to 5.1% of GDP in 2024-25 and below 4.5% by 2025-26, surprising many analysts who expected slightly higher deficit targets.
  • This article explains fiscal deficit, its significance, how the government funds it, and the implications of reducing the deficit.

What is Fiscal Deficit?

  • Definition: Fiscal deficit represents the gap between a government’s revenue and its expenditure. When expenses exceed revenues, the government must borrow money or sell assets to cover the deficit.
  • Revenue Sources: Taxes are the primary source of government revenue. In 2024-25, tax receipts are expected to be ₹26.02 lakh crore, while total revenue is estimated at ₹30.8 lakh crore. Total government expenditure for the same period is projected at ₹47.66 lakh crore.

Government Funding of Fiscal Deficit

  • Borrowing: To finance the fiscal deficit, the government borrows money from the bond market, where lenders compete to purchase government-issued bonds.
  • Central Banks: Central banks, such as the Reserve Bank of India (RBI), play a significant role in the credit market by purchasing government bonds in the secondary market, indirectly providing funds to the government.
  • Borrowing Amount: In 2024-25, the Centre aims to borrow ₹14.13 lakh crore from the market, lower than the target for 2023-24.

Why Does Fiscal Deficit Matter?

  • Inflation: High fiscal deficits can lead to inflation, as the government may resort to printing money to fund the deficit.
  • Market Confidence: Fiscal discipline, reflected in lower deficits, can boost confidence among lenders, potentially improving bond ratings and reducing borrowing costs.
  • Debt Management: A high fiscal deficit can strain the government’s ability to manage public debt. India’s public debt may rise significantly, affecting the country’s fiscal health.
  • International Borrowing: A lower fiscal deficit may make it easier for the government to issue bonds overseas and access cheaper credit.

Future Prospects

  • Reducing Fiscal Deficit: The government plans to lower the fiscal deficit to 5.1% of GDP in 2024-25. It aims to achieve this primarily through increased tax collections, expecting a rise of 11.5%.
  • Balancing Act: Balancing the budget through tax hikes could dampen economic growth, but achieving the ambitious fiscal deficit target remains uncertain.

Conclusion

  • Fiscal deficit, the gap between government revenue and expenditure, holds significant implications for inflation, market confidence, debt management, and international borrowing.
  • The government’s plan to reduce the fiscal deficit in the coming years involves a delicate balance of revenue generation and expenditure control.

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