Government’s Long-Term Fiscal Discipline: A Balancing Act Between Growth and Stability
The Union Budget 2024 has projected a fiscal deficit of 6.8% of GDP for the current fiscal year, which is higher than the target of 3% set by the Fiscal Responsibility and Budget Management (FRBM) Act. The government has also revised the fiscal consolidation roadmap, aiming to bring down the fiscal deficit to 4.5% by 2025-26. The government has cited the need to boost public spending and revive the economy amid the COVID-19 pandemic as the reasons for relaxing the fiscal rules. However, some experts have raised concerns over the sustainability and credibility of the fiscal policy, and the impact of high borrowing on inflation and interest rates.
What is fiscal deficit and why does it matter?
Fiscal deficit is the difference between the government’s total expenditure and its total revenue (excluding borrowings) in a given year. It indicates the extent to which the government is spending beyond its means, and relying on debt to finance its activities. Fiscal deficit is usually expressed as a percentage of GDP, which measures the size of the economy.
Fiscal deficit matters for several reasons. First, it reflects the fiscal discipline and prudence of the government, and its ability to manage its finances efficiently and effectively. Second, it affects the macroeconomic stability and growth of the country, as it influences the aggregate demand, the savings-investment balance, the current account balance, and the public debt. Third, it impacts the monetary policy and the financial sector, as it determines the borrowing requirement of the government, the interest rates, the inflation, and the credit availability.
What are the fiscal rules and why are they relaxed?
Fiscal rules are the legal or constitutional constraints on the fiscal policy of the government, such as the limits on the fiscal deficit, the debt, and the expenditure. Fiscal rules are intended to ensure fiscal responsibility and sustainability, and to prevent fiscal profligacy and populism. Fiscal rules are also meant to enhance the credibility and transparency of the fiscal policy, and to signal the commitment of the government to the domestic and international investors.
The FRBM Act, enacted in 2003, is the main fiscal rule in India, which sets the targets and limits for the fiscal policy of the central government. The FRBM Act mandates the government to reduce the fiscal deficit to 3% of GDP by 2020-21, and to contain the debt to 40% of GDP by 2024-25. The FRBM Act also prescribes the annual reduction of the revenue deficit and the effective revenue deficit, and the medium-term fiscal policy statement and the fiscal strategy statement.
However, the FRBM Act allows the government to relax the fiscal rules in case of exceptional circumstances, such as war, national security, natural calamity, or structural reforms. The government has invoked this escape clause to deviate from the fiscal targets in the Union Budget 2024, citing the unprecedented situation created by the COVID-19 pandemic, which has severely affected the economy and the public health. The government has argued that relaxing the fiscal rules is necessary to provide fiscal stimulus and support to the various sectors and segments of the society, and to boost the economic recovery and growth.
What are the challenges and opportunities for the fiscal policy?
The fiscal policy of the government will face several challenges and opportunities in the coming years. Some of the challenges are:
- To achieve the fiscal consolidation and adhere to the revised fiscal roadmap, without compromising the quality and adequacy of the public expenditure and the social welfare schemes.
- To mobilise the adequate and sustainable revenue sources, and to improve the tax compliance and administration, while rationalising the tax rates and exemptions.
- To manage the high and rising public debt, and to ensure its servicing and repayment, without crowding out the private investment and consumption.
- To coordinate and harmonise the fiscal policy with the monetary policy and the external sector policy, and to maintain the macroeconomic balance and stability.
Some of the opportunities are:
- To leverage the fiscal policy as a tool for promoting inclusive and sustainable development, and to align it with the national and global goals and commitments, such as the Sustainable Development Goals and the Paris Agreement.
- To utilise the fiscal policy as a catalyst for enhancing the productivity and competitiveness of the economy, and to foster innovation and digitalisation, while addressing the structural and institutional bottlenecks and reforms.
- To harness the fiscal policy as a means for strengthening the federalism and cooperative governance, and to improve the fiscal decentralisation and devolution, while ensuring the fiscal autonomy and accountability of the states and local bodies.
- To adopt the fiscal policy as a framework for enhancing the transparency and accountability of the public finances, and to improve the fiscal reporting and auditing, while ensuring the participation and oversight of the parliament and the civil society.
Conclusion
The government’s long-term fiscal discipline is a balancing act between growth and stability, which requires careful calibration and trade-offs. The government has relaxed the fiscal rules in the Union Budget 2024, in order to boost the public spending and revive the economy amid the COVID-19 pandemic. However, the government has also revised the fiscal consolidation roadmap, aiming to bring down the fiscal deficit to 4.5% by 2025-26. The future of the fiscal policy will depend on the ability and willingness of the government to overcome the challenges and seize the opportunities, and to work towards the fiscal responsibility and sustainability.
1. What is the projected fiscal deficit of the central government for the fiscal year 2024-25, as per the Union Budget 2024?
(A) 3%
(B) 4.5%
(C) 6.8%
(D) 8.5%
Answer: (B) 4.5%
2. What is the name of the act that sets the fiscal rules and targets for the central government in India?
(A) Fiscal Responsibility and Budget Management Act
(B) Finance Commission Act
(C) Public Debt Management Agency Act
(D) Government Securities Act
Answer: (A) Fiscal Responsibility and Budget Management Act
3. Which of the following is not an example of an exceptional circumstance that allows the government to relax the fiscal rules, as per the FRBM Act?
(A) War
(B) National security
(C) Natural calamity
(D) General election
Answer: (D) General election
4. What is the impact of high fiscal deficit on the inflation and interest rates, according to some experts?
(A) It increases both inflation and interest rates
(B) It decreases both inflation and interest rates
(C) It increases inflation and decreases interest rates
(D) It decreases inflation and increases interest rates
Answer: (A) It increases both inflation and interest rates
5. What is the difference between the revenue deficit and the effective revenue deficit?
(A) Revenue deficit is the excess of total revenue expenditure over total revenue receipts, while effective revenue deficit is the excess of revenue deficit over grants for creation of capital assets
(B) Revenue deficit is the excess of total revenue expenditure over total revenue receipts, while effective revenue deficit is the excess of grants for creation of capital assets over revenue deficit
(C) Revenue deficit is the excess of total revenue receipts over total revenue expenditure, while effective revenue deficit is the excess of revenue deficit over grants for creation of capital assets
(D) Revenue deficit is the excess of total revenue receipts over total revenue expenditure, while effective revenue deficit is the excess of grants for creation of capital assets over revenue deficit
Answer: (A) Revenue deficit is the excess of total revenue expenditure over total revenue receipts, while effective revenue deficit is the excess of revenue deficit over grants for creation of capital assets
