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Govt. hopes to cut fiscal deficit to 4.5% by FY26

Topics Covered: Government Budgeting.

Govt. hopes to cut fiscal deficit to 4.5% by FY26:


Context:

Finance Minister Nirmala Sitharaman has pegged the fiscal deficit for 2021-22 at 6.8% of the GDP and aims to bring it back below the 4.5% mark by 2025-26.

The original fiscal deficit target for 2020-21 was 3.5%. However, in reality, the deficit has shot up to a high of 9.5% of the GDP due to:

  1. The impact of the COVID-19 pandemic.
  2. Low revenue flows due to the lockdown.
  3. Negative economic growth clubbed with high government spending to provide relief to vulnerable sections of society.

What next?

Finance minister has also proposed to introduce amendments to the FRBM Act to make necessary change in the fiscal consolidation roadmap.

What is the fiscal deficit?

It is the difference between the Revenue Receipts plus Non-debt Capital Receipts (NDCR) and the total expenditure.

  • In other words, fiscal deficit is “reflective of the total borrowing requirements of Government”.

Impact of high fiscal deficit:

In the economy, there is a limited pool of investible savings. These savings are used by financial institutions like banks to lend to private businesses (both big and small) and the governments (Centre and state).

  • If the fiscal deficit ratio is too high, it implies that there is a lesser amount of money left in the market for private entrepreneurs and businesses to borrow.
  • Lesser amount of this money, in turn, leads to higher rates of interest charged on such lending.
  • A high fiscal deficit and higher interest rates would also mean that the efforts of the Reserve Bank of India to reduce interest rates are undone.

What is the acceptable level of fiscal deficit for a developing economy?

For a developing economy, where private enterprises may be weak and governments may be in a better state to invest, fiscal deficit could be higher than in a developed economy.

  • Here, governments also have to invest in both social and physical infrastructure upfront without having adequate avenues for raising revenues.
  • In India, the FRBM Act suggests bringing the fiscal deficit down to about 3 percent of the GDP is the ideal target. Unfortunately, successive governments have not been able to achieve this target.

What is the FRBM Act?

The Fiscal Responsibility and Budget Management Act (FRBM Act), 2003, establishes financial discipline to reduce fiscal deficit.

What are the objectives of the FRBM Act?

  1. The FRBM Act aims to introduce transparency in India’s fiscal management systems.
  2. The Act’s long-term objective is for India to achieve fiscal stability and to give the Reserve Bank of India (RBI) flexibility to deal with inflation in India.
  3. The Act was enacted to introduce more equitable distribution of India’s debt over the years.

Key features of the FRBM Act:

The FRBM Act made it mandatory for the government to place the following along with the Union Budget documents in Parliament annually:

  1. Medium Term Fiscal Policy Statement.
  2. Macroeconomic Framework Statement.
  3. Fiscal Policy Strategy Statement.

InstaLinks:

Prelims Link:

  1. What is fiscal deficit?
  2. What is revenue deficit?
  3. What is capital budget?
  4. What is effective revenue deficit?
  5. What is frbm act?

Sources: PIB.