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Context

• Union Finance Minister Nirmala Sitharaman outlined fiscal goals during the Budget speech.
• Fiscal deficit targeted to reduce to 5.1% of GDP in 2024-25.
• Ambitious goal of bringing fiscal deficit below 4.5% of GDP by 2025-26.
• Revised estimate for fiscal deficit in 2023-24 lowered to 5.8% of GDP.

Fiscal Deficit Definition:

• Fiscal deficit signifies the gap between a government's expenditure and revenue.
• Occurs when government spending exceeds its income, necessitating borrowing or asset sales.
• Taxes constitute a vital revenue source for governments.

Government's Fiscal Health:

• Running a fiscal surplus, where revenue exceeds expenditure, is uncommon.
• Focus is on managing and controlling the fiscal deficit.
• Distinction emphasized between fiscal deficit and national debt.
• Typically expressed as a percentage of the country's Gross Domestic Product (GDP).

Funding Fiscal Deficit:

• Primary method involves borrowing from the bond market.
• In the fiscal year 2024-25, the Centre is expected to borrow ₹14.13 lakh crore.
• Central banks, such as the Reserve Bank of India (RBI), contribute indirectly through open market operations.

Monetary Policy Impact:

• Central bank lending rates play a crucial role in determining government borrowing costs.
• Post-pandemic, rising lending rates increase government borrowing expenses.
• Government's commitment to reducing fiscal deficit aligns with monetary policy objectives.

Significance of Fiscal Deficit:

• Direct linkage between a country's fiscal deficit and inflation levels.
• Serves as an indicator of the government's fiscal discipline.
• Influences market perception, affecting bond ratings and borrowing costs.

Challenges and Public Debt:

• High fiscal deficit levels can strain overall public debt management.
• International Monetary Fund (IMF) cautioned about India's public debt potentially exceeding 100% of GDP.
• Government's interest in international bond markets; lower fiscal deficit enhances access to affordable credit.

Future Plans and Challenges:

• Centre's strategic plan to reduce fiscal deficit to 5.1% in 2024-25.
• Dependence on tax collections, expecting an 11.5% increase in 2024-25.
• Projections considered ambitious; uncertainty regarding achieving the fiscal deficit targets.

PRACTICE QUESTION Q. Discuss the significance and challenges associated with setting and achieving fiscal goals in the context of economic governance. Provide examples from recent fiscal policies to support your analysis.