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.

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