Editorial     

Published: January 15, 2024
Updated: January 15, 2024

Fiscal deficit – fly in the ointment

It is now abundantly clear that the Indian economy is on the revival path. Positive proof of this is that at a time when the geopolitical climate is rife with uncertainties on account of the prolonged Russia-Ukraine war, the Israel-Hamas conflict and China’s belligerent expansionist designs, none of these developments have had a visible adverse impact on the Indian economy.

Even when the pace of economic growth of large industrialised and developed countries has slowed down to between 2 and 4 per cent, the Indian economy is growing at a rate over 6.5 per cent and has emerged as the fastest growing economy in the world.

Little wonder that the International Monetary Fund has predicted that India will emerge as the world’s third largest economy in 2027, leapfrogging over Japan and Germany to a GDP of $ 5 trillion, and aspiring to become a developed country by 2047.

According to experts, India will need at least 6.5 per cent growth to reach the first target in 2027 and 8-9 per cent growth to achieve the second target by 2047. The visible recovery in the economy, reflecting the 7.8 per cent growth in the first quarter of the current fiscal, instills confidence that the country is likely to fulfill these preconditions.

However, the fly in the ointment is the fact that all is not well on the fiscal deficit front — the difference between the government’s total expenditure and its total revenues (excluding borrowings). The fiscal deficit is an indicator of the extent to which the government must borrow in order to finance its operations and is expressed in terms of a percentage of the country’s GDP.

In the last Union budget, the government had projected reduction of the fiscal deficit from 6.4 per cent in fiscal year 2022-23 to 5.9 per cent of the GDP in the current year ending March 2024. But during the first eight months (April-November 2023) of the current fiscal year, the actual fiscal deficit has hit only 50.7 per cent of the annual target of 5.9 per cent. This means that the country will require to meet the balance of around 50 per cent of the target within the last four months of the year.

The nominal GDP for fiscal year 2024 is now estimated at Rs 296,57,745 crore, which is no doubt higher by 8.9 per cent over the previous year but is still lower than the budgeted Rs 301,75,065 crore. This means that the government will have to contain its fiscal deficit in absolute terms at Rs 17,49,807 crore in fiscal 2024 against the budgeted Rs 17,86,316 crore, to be able to meet the 5.9 per cent deficit target related to the nominal GDP.

Leading economists believe that higher-then-budgeted revenue expenditure triggered through the first and likely second supplementary demand for grants, in combination with a lower than budgeted nominal GDP, will push the fiscal deficit beyond 5.9 per cent of the GDP.

This is quite understandable. In the first batch of supplementary demands for grants for fiscal year 2024, the government had got Parliamentary approval for an extra net spending of Rs 58,378 crore. The second batch of supplementary demands is bound to involve a higher amount as the government is keen to woo voters on the eve of the forthcoming general elections and hence will spend huge amounts on infrastructure development and will shower benefits on the poor. In these circumstances, the chances of realizing the targeted fiscal deficit are remote.