FISCAL CONSOLIDATION

• A fiscal deficit signifies the disparity between a government's revenue and its expenditure. When a government's spending surpasses its income, it is compelled to resort to borrowing or selling assets to cover the deficit. Taxes constitute the primary revenue source for any government.
• In the fiscal year 2024-25, the government anticipates tax receipts amounting to ₹26.02 lakh crore, contributing to a total projected revenue of ₹30.8 lakh crore. In contrast, the Union government's expected expenditure is estimated at ₹47.66 lakh crore.
• A fiscal surplus occurs when a government's revenue exceeds its expenditure. However, such surpluses are uncommon in contemporary governance. Most governments prioritize maintaining control over the fiscal deficit rather than aiming for a surplus or budgetary balance.
•  It is crucial to differentiate between fiscal deficit and national debt. The national debt represents the cumulative amount owed by a government to its lenders at a specific point in time. This debt accrues over years of running fiscal deficits and resorting to borrowing to bridge the financial gaps.
• Fiscal deficit is typically expressed as a percentage of a country's Gross Domestic Product (GDP). This representation aims to gauge the government's ability to repay its lenders. A higher fiscal deficit, relative to GDP, suggests a potentially challenging scenario for lenders to be repaid. Larger economies may sustain higher fiscal deficits in absolute monetary terms.

3. Funding the Fiscal Deficit

• To bridge its fiscal deficit, the government primarily turns to the bond market, where lenders compete to finance the deficit by purchasing government-issued bonds. In the fiscal year 2024-25, the Centre anticipates borrowing a gross sum of ₹14.13 lakh crore from the market, a figure slightly below the earlier projection. The government aims to fund its expenditures through increased Goods and Services Tax (GST) collections in the same period, contrary to economists' expectations of a higher borrowing target.
• Central banks, such as the Reserve Bank of India (RBI), play a significant role in the credit market. While not always directly purchasing government bonds, central banks may acquire them in the secondary market from private lenders who initially bought the bonds. Through 'open market operations,' the RBI creates fresh money, potentially impacting the money supply and contributing to rising prices in the broader economy over time.
• Government bonds are generally considered risk-free, as the government has the ability, in extreme scenarios, to seek assistance from the central bank. This support enables the government to create fresh currency for repaying lenders. Consequently, governments usually find it relatively easy to borrow from the market. However, the challenge lies in the interest rate at which the money is borrowed. Worsening government finances can lead to decreased demand for government bonds, prompting the government to offer higher interest rates to lenders, resulting in elevated borrowing costs.
• Monetary policy plays a pivotal role in determining government borrowing costs. Sharp rises in central bank lending rates, observed post-pandemic, increase the expense for governments to borrow money. This aspect contributes to the government's motivation to curb its fiscal deficit.

4. Significance of Fiscal Deficit

• The fiscal deficit holds significant importance for various reasons, one being its direct correlation with inflation. A persistently high fiscal deficit can lead to increased inflation, as the government resorts to using freshly issued money by the central bank to cover the deficit. Notably, the fiscal deficit peaked at 9.17% of GDP during the pandemic but has since shown improvement, projected to decline to 5.8% currently.
• The level of the fiscal deficit communicates the government's commitment to fiscal discipline to the market. A lower fiscal deficit can enhance the ratings assigned to the government's bonds, signaling prudent financial management. When the government relies more on tax revenues and borrows less, it instills confidence in lenders, thereby reducing the government's borrowing costs.
• A high fiscal deficit can impede the government's ability to manage its overall public debt effectively. Concerns have been raised, with the International Monetary Fund (IMF) cautioning that India's public debt might surpass 100% of GDP in the medium term, despite differing opinions from the Centre. Managing public debt becomes crucial, especially as the government expresses interest in tapping into the international bond market. A lower fiscal deficit can facilitate the government's bond sales overseas, providing access to more affordable credit.

5. Fiscal Challenges in 2024-25

• The Centre outlines ambitious plans to reduce its fiscal deficit to 5.1% of GDP in the fiscal year 2024-25, despite intentions to boost capital expenditure and allocate funds for various programs. Achieving this goal hinges largely on augmenting revenue through increased tax collections. The government anticipates an 11.5% growth in tax collections for the mentioned period.
• To align with fiscal targets, the Centre envisions trimming expenditure in specific areas. A notable adjustment includes a reduction in the fertilizer subsidy, from ₹1.88 lakh crore in 2023-24 to ₹1.64 lakh crore in 2024-25. Similarly, the projected expenditure on food subsidy is slated to decrease from ₹2.12 lakh crore to ₹2.05 lakh crore during the same period.
• While the government aims to balance the budget primarily through elevating tax rates to bolster collections, this approach raises concerns about potential repercussions on economic growth. Heightened taxes can act as a dampener on economic activity. Striking a delicate equilibrium between fiscal discipline and sustaining economic momentum becomes imperative.
• The feasibility of meeting the ambitious fiscal deficit target remains uncertain. Projections are susceptible to inaccuracies, and the government's ability to achieve its fiscal goals may face challenges. Relying solely on raising tax rates poses risks to economic growth, emphasizing the need for a comprehensive and dynamic approach to fiscal management.