FISCAL GOALS

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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.