Fiscal Deficit: Key Insights

Why in News?

The Confederation of Indian Industry (CII) has recommended that the Union Government avoid setting overly ambitious fiscal deficit targets to ensure sustainable economic growth.

What is Fiscal Deficit?

• Definition: The fiscal deficit is the gap between the government’s total expenditure and its total revenue (excluding borrowings).
• Current Status:
  • Fiscal deficit for 2023-24: 5.8% of GDP.
  • Average fiscal deficit for Indian states in 2023-24: 3.5% of GSDP.
  • Targets:
    • 4.9% of GDP for 2024-25.
    • 4.5% of GDP for 2025-26.
• Borrowing Limit:
  • The Union Government capped states’ net borrowing at 3.5% of GSDP, as per the recommendations of the 15th Finance Commission.

Fiscal Responsibility and Budget Management (FRBM) Act, 2003

• Objective: To ensure sustainable fiscal management and reduce inter-generational fiscal imbalances.
• Key Features:
  • Enacted to implement fiscal discipline under Article 292 of the Constitution.
  • Mandates annual submission of the following with the Union Budget:
    • Medium-Term Fiscal Policy Statement
    • Macroeconomic Framework Statement
    • Fiscal Policy Strategy Statement
• NK Singh Committee Recommendations (2016-17):
  • Suggested a 60% Debt-to-GDP ratio by 2023.
  • Current ratio: Approximately 81%.
• State Fiscal Responsibility Acts:
  • Individual states have enacted similar legislation to manage their fiscal health, borrowing limits, and expenditures.

Constitutional Provisions Related to Fiscal Management

1. Article 280: Mandates the establishment of a Finance Commission every five years to oversee fiscal matters.
2. Article 293: Grants states fiscal autonomy but restricts borrowing from within India without guarantees from their Consolidated Fund.
3. 7th Schedule: Outlines the fiscal jurisdiction of the Union and states.
4. Revenue Distribution (Articles 268-272):
   • Article 268: Duties levied by the Centre but collected and retained by states.
   • Article 269: Taxes assigned to states entirely.
   • Article 270: Provisions for sharing Union taxes with states.
5. Grants-in-Aid:
   • Statutory Grants (Article 275): Obligatory financial assistance to states.
   • Discretionary Grants (Article 282): Permits grants for public purposes irrespective of legislative competence.

Recommendations by CII for Fiscal Discipline

1. Fiscal Stability Reporting:
   • Introduce annual reports on fiscal risks and stability under various scenarios.
   • Helps assess potential economic fluctuations and their fiscal implications.
2. State-Level Fiscal Stability Reporting:
   • Encourage states to report fiscal health regularly, improving transparency and identifying risks.
3. Moderate Targets:
   • Adhere to a fiscal deficit target of 4.9% of GDP for FY25 and 4.5% for FY26.
   • Avoid setting overly aggressive targets that could hinder growth.
4. Allow States Direct Borrowing:
   • Permit states to borrow directly from the market for more fiscal flexibility.
   • Manage guarantees provided by states for State Public Sector Enterprises (PSEs) to mitigate fiscal risks.
5. Credit Rating for States:
   • Develop a transparent credit rating system to incentivize states’ fiscal discipline.
   • Link borrowing costs to fiscal performance, rewarding well-performing states with reduced borrowing expenses.

Quick Facts

• Confederation of Indian Industry (CII):
  • Founded: 1895.
  • Headquarters: New Delhi.
  • Objective: Facilitates industry growth through consultations with government and stakeholders.
  • Role in 2023: Served as the B20 India Secretariat during India’s G20 Presidency.