Fiscal Deficit in Indian Budgets
The fiscal deficit in 2022-23 is estimated at 6.4% of GDP, which is consistent with the broad path of fiscal consolidation to reach a fiscal deficit level below 4.5% by 2025-26. The fiscal deficit of the government for 2022-23 is estimated to be Rs 1661196 crore. The Revised Estimates for 2021-22 indicate a fiscal deficit of Rs 1591089 crore as against the Budget Estimates of Rs 1506812 crore.
“While setting the fiscal deficit level in 2022-23, I am conscious of the need to nurture growth through public investment to become stronger and sustainable,” Finance Minister Nirmala Sitharaman, while presenting the Union Budget 2022-23 in Parliament.
Fiscal deficit is the borrowing from the Reserve Bank of India plus other liabilities of the government to meet its expenditure.
According to the Government of India, fiscal deficit is the “excess of total disbursements from the Consolidated Fund of India, excluding repayment of the debt, over total receipts into the Fund (excluding the debt receipts) during a financial year”. The deficit is calculated by taking out the difference between the government’s total income or receipts and its expenditures.
In the fiscal year 2021-22, it has been marginally increased.
This government debt has real long-term consequences. If interest payments on the debt ever become untenable through normal tax-and-borrow revenue streams, the government faces three options. They can cut spending and sell assets to make payments, they can print money to cover the shortfall, or the country can default on loan obligations. The second of these options, an overly aggressive expansion of money supply, could lead to high levels of inflation. Fiscal deficit can lead to cost-push inflation. Higher interest rates increase production cost, which is passed on to consumers, thereby leading to higher prices.
If the deficit arises because the government is engaged in extra spending projects, for example, infrastructure building or grants to businesses, then those sectors chosen to receive money receive a short-term boost in operations and profitability.
If the deficit arises because receipts to the government have fallen, either through tax cuts or a decline in business activity, then no such stimulus takes place. Long-term deficits, however, can be detrimental for economic growth and stability.
In India, the fiscal deficit was recorded at around 13% of the GDP for 2021 and is estimated at around 10% for 2021-22 given the pandemic situation the economy is facing (according to the RBI Bulletin, June 2021.)
In line with global practice, India has also been under a fiscal rule regime since 2003 with a mandate that the fiscal deficit relative to GDP should be 3 percent each for the central and consolidated position of state governments according to the Fiscal Responsibility and Budget Management (FRBM) Act, 2003.
Since 2004, though the government adhered to the FRBM Act of 2003, it could not rein in the fiscal deficit because of two factors: (a) downward rigidities of revenue expenditure and (b) lower revenue realisation (both tax and non–tax revenues), which resulted in a persistently high revenue deficit relative to GDP for the general government. Before this, a high fiscal deficit of 9.6 percent was witnessed in the period 2001-02.
The FRBM Act initially sought that the government rein in its fiscal deficit to 3 percent of GDP by 2008-09. The Budget that year did target reducing it by 2.5 percent. However, after the Lehman crisis and the fiscal expansionary policies by the centre, the fiscal deficit was over 6 percent of GDP that year.
The N K Singh panel, constituted to review fiscal consolidation, wanted the deficit to be 3% by 2017-18 and kept at that level for the next two years and to be brought down to 2.5% by FY23.