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Finance Minister Nirmala Sitharaman will soon present the Union Budget for 2025 on February 1, marking her eighth consecutive budget presentation. Under PM Modi's leadership, India's tax system has been evolving with regular updates, and this year promises to bring further changes to the tax regime.
Imagine if you spent more money than you earned every month. If the extra spending is for long-term goals, like buying a house or investing in your future, it can be worthwhile. But if the extra spending is for things you don't really need, it can lead to financial trouble. Similarly, a fiscal deficit occurs when the government spends more money than it generates.
For the fiscal year 2024-25, India's fiscal deficit is estimated to be Rs 16.13 lakh crore, which is about 4.9 percent of the country's GDP. While that figure might sound concerning, let's break it down further to understand what it truly means.
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The fiscal deficit is essentially the gap between what the government spends and what it earns, excluding borrowed funds. A moderate fiscal deficit is often seen as a way to fund development initiatives like infrastructure, healthcare, and education, which ultimately benefit the economy. However, if the deficit grows too large, it can lead to increased debt, inflation, and economic instability.
Revenue deficit: This happens when the government's daily expenses, such as salaries, pensions, and subsidies, exceed its income. For the 2024-25 financial year, the revenue deficit is projected to be around 1.8 percent of GDP.
Primary deficit: This is the fiscal deficit minus interest payments on debt. It helps show how much the government is borrowing purely for new expenses rather than for servicing old debts.
Effective revenue deficit: This measure takes into account the revenue deficit while adjusting for grants used for capital spending. It offers a more accurate look at the government's operational financial health.
When government spending outpaces its income, it turns to various ways of raising funds:
Market borrowings: The government issues bonds that investors purchase, effectively lending money to the government.
Small savings and provident funds: These include schemes like the Public Provident Fund (PPF) and National Savings Certificates (NSC), where the government borrows from the general public.
Foreign loans: The government may also seek loans from international bodies like the World Bank or borrow from global markets by issuing bonds.
Back in 1991, India's fiscal deficit was alarmingly high, crossing 8 percent of GDP, which led to a severe financial crisis. The country struggled with a balance of payments crisis, foreign exchange reserves dwindled, and the government was forced to pledge gold to secure foreign loans. This crisis prompted India to adopt a more disciplined approach to fiscal management and reforms.
While the fiscal deficit number alone might sound alarming, its true impact depends on the context:
Trends over time: Is the fiscal deficit rising or falling? A slight decrease in 2024-25 is a sign that the government is working to rein in its borrowing.
Global comparisons: While developed countries might manage higher deficits, emerging economies like India must manage their fiscal deficits carefully to ensure long-term economic stability.
Smart spending: Borrowing for growth-driving projects like infrastructure or education is generally seen as a good use of funds. But borrowing to cover routine spending can become problematic.
Managing the fiscal deficit is like balancing a budget at home. The goal is not to eliminate the deficit completely, but to keep it under control. The government can reduce its reliance on borrowing by making smarter spending choices, expanding the tax base, and attracting private investments.
If the fiscal deficit is handled well, it can support economic growth without creating too much debt. But if it's not managed properly, it can result in a shaky economy. In the coming years, how India manages its fiscal deficit will play a key role in shaping the country's economic future.
