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India's Fiscal deficit glide path linked to India's credibility

 India's Fiscal deficit budgeted for FY 23-24 was 5.9% of GDP which is an important metric for measuring the efficiency of the Government of India in comprehensively managing its finances including its Revenue Collection and its Spending efficiency in terms of Capex as well as Revenue expenditures.

As per FRBM Act GOI has taken up an obligation to reduce the fiscal deficit over the years and bring it down to 4.5% in Fy26.In this context, we need to understand that in FY 25 it has necessarily reduce it to 5.3% or less than that and in the forllowing FY26 it has compress the Fiscal deficit to 4.5% inorder to achieve as committed.

Why this FD reduction is important

1)Fiscal deficit means that the Government is living beyond its means i.e it is borrowing out of its future revenue streams. More the FD, the Govt may be forced to borrow if its Revenue collections languish or expenditure runs out of control.We have seen two Covid years where GOI faced double whammies in both the years when Revenues faltered and Revenue expenditure skyrocketed due to subsidies and free foodgrains to people.Therefore we should reduce FD in years of relative stability like the current years inorder to save for rainy years lest we face storms in the coming years.

2)FD of Centre and States combined is already more than 8% and this profligacy, may mean more borrowings by both Centre and State which will burden the Govts, with huge servicing costs i.e interest payments.Since our Govt debt to GDP is already high at more than 80% and should we face another Covid type Black Swan event, then our borrowings level may go out of hand.

IMF has already warned about this untenable  Government Debt to GDP levels getting out of hand if necessary steps to rein in Fiscal Deficits are not taken.

When Govts. borrow more for Revenue expenditure that may crowd out Private sector investments, which will adversely impact further asset creation and generation of employment.

3)Containing FD becomes an important signal to lenders and Ratings Agencies across the globe that we are committed to Fiscal Discipline. GOI's credibility in fiscal management is in sticking to its committed fiscal deficit glide path when the weather is clear. Only by adhering to the promised Fiscal deficit glide path we can improve our sovereign ratings , which will help both the Govts as well as private sector to source funds at cheaper rates.

4)High FD of 5% or more will stoke inflation in the economy and if major portion of FD is for Revenue expenditure, then the country and its people may face high inflation. Inflation in true sense is a Tax on the poor and it constrains the disposable income in the hands of the people which will not help in the cause of growing our economy rapidly.

5) Fiscal deficit has a moral hazard dimension,  since Fiscal deficit indicates that we are borrowing from our children inorder to sustain or feed ourselves today.In short as fathers and grand fathers we are living beyond our means. As per reputed Economists,only FD of 3% of GDP is sustainable in the long run and we have a long way to go.


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