Analysis of the Center’s Capital Expenditure and Fiscal Deficit

• In January, the Centre’s capital expenditure fell by 40.5% to ₹47,600 crore from ₹80,000 crore the previous year.
• Fiscal Deficit Widening: At the end of January, the fiscal deficit had reached 64% of the revised estimates for 2023-24. Despite budgetary issues, the government appears to be on track to fulfil its reduced deficit target of 5.8% of GDP for the year.

What is a Fiscal Deficit?

• The fiscal deficit is the excess of total disbursements from the Consolidated Fund of India over total collections, excluding debt repayment, in a given fiscal year.
• Formula: The fiscal deficit is calculated as the total government spending (capital and revenue) minus the total government income.

Reasons behind Fiscal Deficit

[1] Fall in Income

• Lower tax collection: Economic downturn, tax evasion, and GST implementation challenges.
• Impact of economic sectors closed during the pandemic: Economic activity closures result in lower tax receipts.
• The government missed its disinvestment targets: Failure to meet disinvestment targets leads to fewer capital receipts.

[2] Rise in Expenditure

• Factors contributing to high inflation include high inflation rates, which raise import and borrowing expenses.
• Importance of social infrastructure investment: Focus on social infrastructure to promote inclusive growth and employment.
• External market volatility affects Indian expenditure: The reliance on imports exposes India to external market swings.
• Unproductive spending, such as subsidies, increase fiscal strain.

[3] Rise in Borrowings

• Need for market financing for policy implementation: Borrowing to fund policy initiatives like as bank recapitalization, agriculture loan waivers, and UDAY.

Implications of the fiscal deficit

• The vicious circle of borrowing and repayment: Continuous borrowing to repay loans, which leads to a debt trap.
• Inflation: Increased borrowing causes higher interest rates and inflation.
• Reduced private sector borrowing: Government borrowing reduces borrowing opportunities in the private sector.
• Discouragement of Private Investment: Inflation and insufficient finance discourage private investment.
• Risk of a credit rating downgrade High borrowing increases the chance of a credit rating drop.
• Limits Revenue Spending: The rising fiscal imbalance is hurting government perks such as dearness allowance and dearness relief.
• overseas Dependence: Borrowing from overseas sources increases reliance and vulnerability to external fiscal policy. 

Measures for Control: FRBM Act of 2003

• The FRBM Act seeks to foster fiscal discipline and intergenerational justice in fiscal management, hence supporting long-term macroeconomic stability. 
• Targets:
  1. Limit the fiscal deficit to 3% of GDP by March 31, 2009.
  2. Completely eradicate the revenue imbalance.
  3. Reduce liabilities to 50% of the anticipated GDP by 2011.
  4. Prohibit direct borrowing from the RBI to monetize the deficit. 
• Section 4(2) of the Act authorises the Centre to exceed its annual fiscal deficit targets in certain circumstances, such as national security, disaster, agricultural collapse, or structural reforms.
• Review Committee: In May 2016, an NK Singh-led committee was constituted to study the FRBM Act. Recommendations included targeting a budget deficit of 3% of GDP until March 31, 2020, then reducing it to 2.8% in 2020-21 and 2.5% by 2023.
• Current Targets:
  1. The most recent clauses of the FRBM Act require lowering the budget deficit to 3% of GDP by March 31, 2021.
  2. The central government’s debt shall not surpass 40% of GDP by 2024-25, among other conditions.

Source: https://www.businesstoday.in/latest/economy/story/centre-on-track-to-meet-fiscal-deficit-target-of-58-for-fy24-418991-2024-02-26