CII Urges Centre to Stick to Fiscal Deficit Target

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).

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.

Source: TH