Fiscal deficit is a crucial concept in economics that reflects the financial health of a government. It represents the variance between the government’s earnings (revenue) and its spending (expenditure) in a fiscal year. When the government spends more money than it earns from taxes and other sources, it incurs a fiscal deficit. This deficit indicates that the government needs to borrow money to cover its expenses beyond its earnings.
For instance, if a government’s total earnings from taxes, fees, and other sources amount to Rs 100 crore in a year, but its total spending on infrastructure, salaries, subsidies, and other expenses is Rs 120 crore, the fiscal deficit would be Rs 20 crore. This deficit signifies that the government needs to borrow Rs 20 crore to cover its expenses beyond its earnings.
India’s Fiscal Deficit Journey
Let’s delve into India’s fiscal deficit data during the tenure of the Modi government, which began in 2014. In 2013-14, India’s fiscal deficit stood at 4.5% of GDP. Over the years, there have been fluctuations in the fiscal deficit, reflecting the government’s revenue and expenditure dynamics.
By 2014-15, the fiscal deficit had marginally reduced to 4.1% of GDP, as the new government continued its efforts towards fiscal discipline amidst global economic uncertainties. The following year, in 2015-16, it further decreased to 3.9%, indicating progress in fiscal management strategies and economic stabilization efforts.
In 2016-17, the fiscal deficit saw a slight uptick to 3.5% of GDP, reflecting increased public expenditure and economic reforms aimed at enhancing growth prospects. This trend continued into 2017-18, with the deficit remaining at 3.5% of GDP.
The fiscal deficit rose to 3.4% of GDP in 2018-19. In 2019-20, it widened to 4.6% of GDP due to subdued revenue growth and higher expenditure commitments, exacerbated by the economic impact of the COVID-19 pandemic.
During 2020-21, the fiscal deficit surged to 9.3% of GDP, reflecting unprecedented spending on health and economic relief measures amidst the pandemic-induced economic downturn. As the economy began to recover in 2021-22, the deficit narrowed to 6.9% of GDP, supported by improving revenue collection and prudent expenditure management. The deficit further declined to 6.8% in 2021–22, 6.4% in 2022–23, and 5.8% in 2023–24 (revised estimates).
Recent Fiscal Deficit Targets and Projections
In the interim Budget speech in February, Finance Minister Nirmala Sitharaman announced that the revised fiscal deficit target for FY25 was set at 5.1% of the Gross Domestic Product (GDP). She also expressed the target to reduce the fiscal deficit to below 4.5% of the GDP in 2025-26 (FY26).
The fiscal deficit in 2024-25 is estimated to be 5.1% of GDP, adhering to this path. For FY25, the total receipts, excluding borrowings, are estimated at Rs 30.80 trillion, while the total expenditure is projected at Rs 47.66 trillion. The government expects tax receipts to be Rs 26.02 trillion.
Revenue Deficit and Effective Revenue Deficit
Apart from fiscal deficit, it’s also important to consider revenue deficit and effective revenue deficit. Revenue deficit refers to the shortfall between a government’s total revenue receipts and its revenue expenditures, indicating that the government is spending more on regular operational expenses than it is earning from its regular sources of income.
Effective revenue deficit goes a step further by excluding revenue expenditures that create assets or reduce liabilities, focusing solely on the government’s operational financial health.
In the interim Union Budget, the revenue deficit in 2024-25 is targeted at 2% of GDP, lower than the revised estimate of 2.8% in 2023-24. The actual revenue deficit for the year 2013-14 was Rs 3,60,311 crore, which works out to 3.2% of GDP. The Effective Revenue Deficit, which is the revenue deficit less grants for creation of capital assets, was budgeted at Rs 2,05,182 crore in 2013-14, i.e., 1.8% of GDP.
Conclusion
Understanding fiscal deficit, revenue deficit, and effective revenue deficit is crucial for assessing a government’s financial health and its ability to manage its expenses and revenue. The recent targets and projections set by the Finance Minister indicate the government’s commitment to fiscal consolidation and reducing the fiscal deficit in the coming years.
