Syllabus: GS3/ Economy
Context
- The Confederation of Indian Industry (CII) has suggested the government stick to the fiscal deficit target of 4.9% of GDP for 2024-25 and 4.5% for 2025-26.
What is the fiscal deficit?
- Fiscal Deficit is defined as excess of total budget expenditure (revenue and capital) over total budget receipts (revenue and capital) excluding borrowings during a fiscal year.
- Fiscal Deficit = Total Expenditure – (Revenue Receipts + Non-Debt Creating Capital Receipts).
| National Debt – The fiscal deficit is different from the national debt. – The national debt is the total amount of money that the government of a country owes its lenders at a particular point in time. – It is usually the amount of debt that a government has accumulated over many years of running fiscal deficits and borrowing to bridge the deficits. |
Implications of fiscal deficit
- Inflationary Pressure: Persistently high fiscal deficits lead to inflation as governments resort to central bank-issued money to finance the deficit.
- Crowding Out effect: When the government borrows a large portion of available funds from financial markets to finance its deficit, it crowds out private investment with reduced access to credit for businesses and individuals.
- Reduced Fiscal Space: A high fiscal deficit limits the government’s ability to respond to economic shocks or crises.
- Difficulty in borrowing: As a government’s finances worsen, demand for the government’s bonds begins to drop, forcing the government to offer to pay a higher interest rate to lenders.
Benefits of lower fiscal deficit
- Improved Credit Ratings: Consistent deficit reduction enhances international credit ratings, lowering borrowing costs in global markets.
- Reduced Debt Servicing: Less spending on interest payments frees funds for development projects like infrastructure, education, and healthcare.
- Improved Balance of Payments: Lower reliance on foreign borrowing stabilizes the exchange rate and current account.
- Enhanced Investor Confidence: Signals fiscal discipline, attracting greater foreign and domestic investments.
CII’s Recommendations for Fiscal Prudence
- State-Level Fiscal Stability Reporting: CII suggests that States should adopt fiscal stability reporting systems to regularly evaluate their financial health.
- State Borrowing and Guarantees: Following the 12th Finance Commission’s recommendations, States can borrow directly from markets.
- However, State Public Sector Enterprises (PSEs) borrowing on State guarantees can adversely affect the fiscal health of States. CII has stressed the importance of monitoring these guarantees to prevent fiscal slippages.
- Credit Rating System for States: An independent and transparent credit rating system can incentivize States to maintain fiscal discipline.
Way Ahead
- There is a need to follow the recommendations of the NK Singh committee, 2017 which proposed a draft Debt Management and Fiscal Responsibility Bill, 2017.
- Incentivizing Financial Savings: Promoting higher household financial savings through tax incentives on financial products, improving returns on long-term savings schemes, and enhancing financial literacy.
- Infrastructure Finance Reforms: Improving mechanisms for financing infrastructure projects by involving the private sector through public-private partnerships (PPP), infrastructure bonds, and development of finance institutions.
| NK Singh committee recommendation – Debt to GDP ratio: The Committee suggested using debt as the primary target for fiscal policy. A debt to GDP ratio of 60% should be targeted with a 40% limit for the center and 20% limit for the states by FY23. – The fiscal deficit to GDP ratio of 2.5% by FY23. – Fiscal Council: The Committee proposed to create an autonomous Fiscal Council with a Chairperson and two members appointed by the center. The role of the Council would include: 1. Preparing multi-year fiscal forecasts, 2. Recommending changes to the fiscal strategy, 3. Improving quality of fiscal data, 4. Advising the government if conditions exist to deviate from the fiscal target. – Deviations: The Committee suggested that grounds in which the government can deviate from the targets should be clearly specified, and the government should not be allowed to notify other circumstances. – Debt trajectory for individual states: The Committee recommended that the Finance Commission should be asked to recommend the debt trajectory for individual states. 1. This should be based on their track record of fiscal prudence and health. |
Source: TH
Previous article
News In Short 09-12-2024
Next article
Navigating India’s Skill Landscape