From 2014 Till Present: A Tale Of Fiscal Prudence

In an era marked by global economic turbulence, the Indian government's commitment to fiscal prudence stands out in a bright spot.

The interim budget presented by Finance Minister Nirmala Sitharaman on 1 February, in anticipation of the forthcoming Lok Sabha polls, underscores a strategic continuity in economic policy that has characterized nearly a decade of governance.

Progressive Decline In Fiscal Deficit

While commenting on the balance between revenue and expenditure, the Finance Minister observed that the government was "on track to bring the fiscal deficit below 4.5 percent by FY26".

The fiscal deficit estimate for financial year 2024 (FY24) has been revised to 5.8 per cent of the gross domestic product (GDP) against the previous estimate of 5.9 per cent. While the same for FY25 has been pegged at 5.1 per cent of the GDP.

In light of this being an election year with Lok Sabha as well as several key states bound for poll, meeting and even exceeding the fiscal deficit target for the financial year can be counted as an achievement of the government.

In its 2014-19 term, the government managed to bring the fiscal deficit down from 4.5 per cent in FY14 to 3.4 per cent in FY19. However, a sharp rise in the revenue deficit from 3.3 per cent in FY20 to 7.3 per cent in FY21 owing to the Covid-19 induced economic slowdown, pushed the fiscal deficit to 9.2 per cent, the levels last seen in the 1990s.

With the economic activity picking up post the containment of pandemic and gradually increasing base of tax collections, the revenue deficit declined from 7.3 per cent in FY21 to that of FY24 seen at 2.8 per cent, indicating a return to its pre-pandemic levels.

This lowered the fiscal deficit to 5.8 per cent in FY24 despite large capital outlay by the government for several infrastructure projects.

As per the recent numbers, the fiscal deficit in amount from April to December stands at Rs 9.82 lakh crore.

As per the revised estimate for FY24, the capital expenditure outlay, a key growth driver, stands at Rs 12.7 lakh crore, an 21 per cent increase from Rs 10.5 lakh crore spent in FY23. The estimate for FY25 is pegged at Rs 15 lakh crore, which is a further 15 per cent rise on an yearly basis.

The revised estimates for spending on transport, the third largest expenditure head after interests and subsidies, for FY24 stand at Rs 5.24 lakh crore, a 34.35 per cent rise on a yearly basis.

In relation to the finances of the states, the Finance Minister said that they will be allowed a fiscal deficit of "3.5 percent of the GSDP" and will be provided "50-year interest free loans".

How Is The Government Managing To Bridge The Gap?

Since the expenditure continues to outpace revenue due to large capital required for development projects and welfare schemes, the government is compelled to borrow large amounts from either banks or through markets by issuing bonds. This is known as financing of the fiscal deficit.

Of all the tools of financing available at the government’s disposal, borrowings from the market constitute one of the largest share of the overall borrowings.

In this interim budget, the Finance Minister has indicated the government’s intention to reduce market borrowings by revising the estimate for FY24 to Rs 1,180,456 crore and that for FY25 to Rs 1,175,182 crore.

Apart from this, the government has also reduced short-term borrowings through the issuance of treasury bills from Rs 1 lakh crore in FY23 to Rs 50,000 crore as per the revised estimate for FY25. More importantly, the external debt too seems to have been kept in check from Rs 37,124 crore in FY23 to Rs 24,832 crore in FY24 and an estimate of Rs 15,952 for FY25.

Along with curbing debt, a steady rise in revenue receipts too seems to have helped the government lower the deficit bar.

The budget document notes that the revised estimates for the total revenue receipts (excluding debt) for FY24 stands at Rs 2,699,713 lakh crore, a 13 per cent rise in yearly terms. Income tax, which constitutes the largest chunk of the government's non-debt receipts, saw a 22.68 per cent yearly rise from Rs 833,260 crore to Rs 1,022,325 crore estimated for FY24.

The Finance Minister also said that effective implementation of the goods and services tax (GST) had enabled "widening as well as deepening of tax collection base" and that the average monthly gross GST collections had "doubled to Rs 1.66 lakh crore this year".

Fiscal Discipline And The India Story

Highlighting how fiscal prudence accompanied by tightening over borrowings will indirectly benefit the economy, the Finance Minister said that “lower borrowings by state will provide for more credit availability to the private sector".

Further, the combination of high growth and low fiscal deficit, even at a time of global uncertainty, is expected to elicit a favourable response from the global rating agencies. If a rating upgrade does follow, it will further increase the flow of investments into India.

A tight fiscal policy, along with critical but disruptive reforms like the GST and the Insolvency and Bankruptcy Code meant short-term pain for the economy. We may now be standing near the beginning of the long-term gain.