Context: In Union Budget (2023-24), Finance Minister chose the path of relative fiscal prudence and projected a decline in fiscal deficit to 5.9% of gross domestic product (GDP) in FY24, compared with 6.4% in FY23.

• The government planned to continue on the path of fiscal consolidation and reach a fiscal deficit below 4.5% by 2025-26.

• In this article the author has discussed the targets, actions and outcomes of the government’s fiscal policy.

What has the Budget proposed on Fiscal Deficit?

• The Union Budget 2023-24 has forecasted a fiscal deficit of 5.9% of GDP for FY24 compared to the revised estimate of 6.4% in 2022-23 and the actual estimates of 6.7% in 2021-22.

• The revenue deficit has been calculated as 2.9% of GDP for 2023-24 while it was 4.1% in the revised estimates for 2022-23.

• The primary deficit, which is calculated as the difference between the current year’s fiscal deficit and the interest on government borrowings in the previous year was 3% according to the revised estimates for 2022-23 and has been calculated as 2.3% of GDP in 2023-24.

• The medium-term fiscal consolidation framework stated that there is a need to reduce fiscal deficit-GDP ratio to 4.5% by 2025-26 from the current 6.4%.

• The revenue deficit is 2.9% of GDP.

• If interest payments are deducted from fiscal deficit, which is referred to as primary deficit, it stood at 3% of GDP in 2022-23 (RE).

• The primary deficit which reflects the current fiscal stance devoid of past interest payment liabilities, is pegged at 2.3% of GDP in Union Budget 2023-24.

What is fiscal deficit?

• When overall government expenditure, exceeds total receipts not counting borrowings, it is called a fiscal deficit.

• Debt, which is an accumulation of annual deficits, is not the same as fiscal deficit.

• The government's gross fiscal deficit (GFD) is the excess of all of its current and capital expenditures, loans net of recovery, over revenue revenues (including external grants) and non-debt capital receipts.

• Some of the reasons for a fiscal deficit include a significant increase in infrastructure capital spending or a revenue deficit.

• It acts as a gauge of how effectively the government is handling its finances, with repeated large fiscal deficits suggesting that the government has been overspending.

• High fiscal deficits are not always bad because they may indicate greater capital expenditures.

• Fiscal Deficit = Total Expenditure (Revenue Exp + Capital Exp) – (Revenue Receipts + Loan Recoveries + Other Capital Receipts except loans borrowed)

Some of the negative consequences of high fiscal deficit are

• The resultant rise of interest rates.

• Rise in inflation.

• Increased burden of interest payments on the exchequer.

What are the major allocations in the Budget?

• Budget 2023-24 has seen lowered allocations for food, petroleum and fertilizer subsidies.

• Significant allocations have been made to ensure food security amid the rising inflation.

• The rising subsidy bill has been a concern for the government and the latest move to reduce the burden on the taxpayer will help achieve the fiscal deficit target of 4.5% by 2025-26 as per the provisions of the Financial Responsibility and Budget Management Act (FRBM) of 2003.

Where does the Budget stand?

• Inflation control:The interest rate management by the RBI through inflation targeting alone cannot effectively control inflation

• Fiscal policy measures: Fiscal policy needs to remain accommodative with focus on gross capital formation with enhanced capital spending, especially infrastructure investment.

• On infrastructure: The Government plans to substantially increase spending on infrastructure as it has a larger multiplier effect on economic growth and employment.

• Capital expenditure: The government should focus on economic growth recovery through Capital expenditure.

• Private investment: Infrastructure investments will boost private investment.

• GDP strengthening: In order to strengthen GDP, the economic growth recovery should be focused.

Can the government stick to fiscal consolidation?

• The major allocations that have been cut down are food, fertilizer and petroleum subsidies.

• The rationalisation of subsidies is important for the government to move towards reaching a fiscal deficit target of 4.5% by 2025-26.

• While continued gradual fiscal consolidation contributes to the stabilisation of the government’s debt burden, authorities remain unlikely to achieve their ambitious target to narrow the deficit.

• The slow fiscal consolidation process in the wake of the pandemic could leave public finances exposed in the event of further major economic shocks.

What can be inferred from the Budget?

• The Finance Minister is focusing on economic growth recovery through capex contending that infrastructure investment will boost private investment.

• In the fiscal deficit-GDP ratio, if the denominator GDP expands, it will reduce the overall fiscal deficit-GDP ratio.

• Hence the Budget focuses on economic growth recovery to strengthen GDP.

Important Facts

Revenue deficit - It is excess of total revenue expenditure of the government over its total revenue receipts.

• Revenue deficit = Total revenue expenditure – Total revenue receipts

Fiscal deficit - It is defined as excess of total budget expenditure over total budget receipts excluding borrowings during a fiscal year.

• Fiscal deficit = Total expenditure – Total receipts excluding borrowings

Primary Deficit - It is defined as fiscal deficit of current year minus interest payments on previous borrowings.

• Primary deficit = Fiscal deficit-Interest payments

Road Ahead

• The government has focussed on capital expenditure-led growth and economic recovery. Infrastructural investment has been proposed as the ideal way to boost private investment.

• Increased GDP as a result of economic growth will contribute to a reduced fiscal deficit to GDP ratio as GDP is the denominator.

• Therefore, the government has and will continue to generate economic growth through capital investment, aiming to propel growth and manage fiscal deficit.