News
Mint Explainer: How does the government plan to meet its fiscal deficit target?
Summary
- The central government’s fiscal deficit during the first five months of FY24 year stood at ₹6.43 trillion, or 36% of the annual estimate of ₹17.87 trillion, according to data released by the Controller General of Accounts
New Delhi: A potential overshooting on expenses due to increasing spending on subsidies, welfare and developmental schemes coupled with lower-than-expected proceeds from divestment could hinder the government’s efforts to meet its fiscal deficit target of 5.9% of GDP for FY24. Mint explains the steps the government is taking to contain the fiscal deficit and the implications if it doesn’t meet the target.
How has the government fared in managing the fiscal deficit so far?
The central government’s fiscal deficit during the first five months of the current financial year stood at ₹6.43 trillion, or 36% of the annual estimate of ₹17.87 trillion, according to data released by the Controller General of Accounts. This was largely due to a sharp jump in capital expenditure, which was offset by lower tax devolution to state governments and an increase in non-tax revenues, analysts said. In the year-ago period, the fiscal deficit was at ₹5.42 trillion, or 32.6% of the FY23 target of ₹16.61 trillion.
What are the major challenges for the government in meeting its fiscal deficit target in FY24?
With several state elections around the corner and the general elections scheduled for May 2024, various schemes are expected to be announced. The union government has already unveiled programmes worth ₹1.18 trillion, spanning sectors from mobility to digital, and plans to make more such announcements during the festive season and until the end of the year.
Though spending on these schemes will be staggered over several fiscal years, there will be some outlay during the ongoing fiscal. Meanwhile, crude oil prices have risen from $82 a barrel in early February 2023, when the union budget was announced, to about $92-$93 a barrel during early October.
With the rise in crude oil prices, fiscal subsidies for oil marketing companies, especially to make up for under-recoveries, could swell. The government has allocated ₹300 billion for OMC refineries in the latest budget to state-owned fuel retailers to make up for their losses. Meanwhile, the government is also unlikely to meet its divestment target of ₹510 billion during the fiscal.
What factors will help the government navigate these challenges?
Despite rising expenses, a higher-than-budgeted dividend surplus transfer of ₹874.2 billion from the Reserve Bank of India (RBI) and higher dividends from public-sector banks is likely to provide some cushion. The higher dividends are due to higher interest rates. The government also expects tax collection to remain buoyant in the coming quarters, adding to the revenue.
What are the consequences of a higher-than-anticipated fiscal deficit?
A higher-than-expected fiscal deficit could cause the government to breach its borrowing targets. This could further impact interest rates and reduce the capital available in the market for private investments. Excessive government spending could also push up inflation as it could lead to an increase in the supply of capital. Overall, a higher fiscal deficit leads to a higher debt burden and higher spending on debt servicing, which can be unhealthy for an economy and risks devaluing the currency.
Is the market worried about the government’s ability to meet its fiscal deficit target?
Analysts and economists see limited fiscal concerns at this stage. This is corroborated by the unchanged market borrowing numbers for the second half of FY24, relative to the amount indicated in the government's budget estimates. The centre plans to borrow ₹6.6 trillion by issuing government securities in the second half of FY24. It is also likely to borrow less than the budgeted amount from the market as it plans to dip into small savings funds.
