As the Union Budget FY 2024 - 25 approaches, the Indian government has targeted reducing the fiscal deficit to 5.1% of the GDP value, promoting responsible growth and careful money management. When analysing budgetary deficits in India and understanding its historical contexts, the upcoming budget should facilitate a balanced approach to prioritise fiscal discipline. India's economic journey towards becoming the fifth-largest economy in the world has been fraught with challenges. The country has grappled with significant infrastructure gaps, high unemployment rates, and persistent inflation. Against this backdrop, gaining a thorough understanding of the concept of fiscal deficit becomes essential. With the Union Budget 2024-25 around the corner, it is crucial to recognise that fiscal deficit represents the variance between the government's earnings and its expenses. This concept is vital as it directly impacts the country's overall economic strength and resilience. Does one ever wonder why governments spend more than what they earn? This is precisely what fiscal deficit answers. As mentioned, a fiscal deficit occurs when a government spends more money than it collects yearly. The government seeks external financing in terms of borrowings to correct this imbalance of funds. The money is earned through taxes, Profits from Public Sectors (PSUs), income from investments and loans, and fees. The funds are allocated towards healthcare, social security, defence, and different facets of economic and infrastructure advancement. This is where the problem arises: the expenses exceed the income, resulting in a fiscal deficit. Let us briefly delve into the other types of budget deficits, more commonly known as fiscal shortfalls: Revenue Deficit: This deficit shows that the government cannot cover daily expenses with its regular income. As part of budgetary deficits, it represents the variance between the government's income (revenue, fees, taxes, etc.) and expenditure (salaries, interest payments, etc.). This signifies an obvious imbalance in the government’s finances. To tackle such issues, the Indian government has put forward various tax reforms and fiscal discipline methods, such as the Fiscal Responsibility and Budget Management (FRBM) Act, to improve public fund management. Primary Deficit refers to the difference between government revenue and expenditure without factoring in interest payments. In simpler terms, it excludes past debts while measuring deficits. Some of the most advised solutions to tackle this are increasing taxes, borrowing, and cutting government spending. Specifically, to address primary deficits, Public-Private Partnerships (PPPs) are arrangements where a government and a private sector entity collaborate to finance and build a project, typically overseen by the government. A notable instance is the Metro Rail Policy, permitting investments from private entities to aid in the design and construction of metro stations within urban locales. The impact of fiscal deficits is much larger scale than one assumes. The effect is directly shown when there is a significant increase in public debt. As the debt grows, the government is forced to repay it rather than use it to enhance essential services. In the long run, it can lead to higher rates of inflation. As the government requests the Reserve Bank of India to print money to assist in paying back the debt, it will lead to an increase in money supply, eventually leading to a spike in prices. As a whole, it slows down economic growth, creating an enduring challenge. In the Financial Year (FY) 2023-24, the fiscal deficit stood at 5.63% less than the total GDP value, compared to 6.4% in FY 2022-23. With India experiencing cases demonstrating the real-world implications of fiscal deficits, the 1991 economic crisis India. Though it was a sum of decades of economic disparities, the central issue was budgetary deficits. To control it, the government had to take loans from both domestic and external sources, which added to the existing debt. As the deficit increased, the balance of payments (BOPs) was adversely affected. To deal with the current problem, the government opted to increase the money supply by printing more currency. This increased inflation, causing imports to become more expensive and pushing the country to the edge of a significant financial crisis. Overcoming this required the country to shift towards privatisation (transferring public assets to the private sector) and liberalisation (decreasing government intervention in the economy). The Gulf War (Aug 1990- Feb 1991), additionally, caused a price hike in oil imports, taking a more significant toll on the trade deficits. This was the turning point for India as an economy, as the government realised the importance of fiscal discipline and its implementation. Though India has faced obstacles posed by fiscal deficits, the government's commitment to focus on fiscal policies is an essential step for more sustainable growth, laying a solid foundation to achieve long-term economic stability.
21 Jul 2024
S Disha
