Union Budget 2025: India’s Fiscal Deficit Challenges Ahead

December 14, 2024

India is currently grappling with hurdles in its efforts to reduce the fiscal deficit to 4.5% of GDP by the fiscal year 2025-26. which peaked at 9.5% of GDP during the pandemic, and has seen slow recovery. Analysts expressed skepticism about the feasibility of achieving this ambitious target amidst a sluggish economic growth environment.

About Fiscal Deficit

A fiscal deficit occurs when a government’s expenditures exceed its revenues. This situation necessitates borrowing or printing money, potentially leading to inflation. High deficits can adversely impact long-term economic stability and growth.

Fiscal Glide Path Concept

The fiscal glide path is a structured approach to gradually reduce the deficit over time. Introduced by the NK Singh Committee, it aimed for a deficit reduction to 3% of GDP by 2020, with subsequent targets for 2021 and 2023. The pandemic disrupted these timelines, complicating the fiscal landscape.

India’s economy is currently growing at a slower pace, creating pressure on the government to increase spending. This need for expenditure complicates the adherence to deficit reduction plans. Tax collections have also dropped, further straining fiscal targets.

Flexibility in Targets

The NK Singh Committee’s recommendations included provisions for flexibility. The government may exceed the 4.5% target by up to 0.5% of GDP during extraordinary circumstances, such as economic crises. This allows for a balance between fiscal discipline and necessary economic support.

Consequences of High Deficits

High fiscal deficits can lead to inflation if financed by excessive money printing or borrowing. This inflation diminishes consumer purchasing power and discourages business investment. Increased market borrowing can elevate interest rates, making loans more expensive and hindering economic activity.

Achieving the 4.5% deficit target by 2025-26 demands meticulous planning and difficult policy decisions. The government’s ability to balance fiscal responsibility with economic support will be vital for sustaining India’s economic growth and stability in the years ahead.

GKToday Facts for Exams:
Fiscal Glide Path A fiscal glide path is a structured method to reduce a deficit gradually. It aims to mitigate risks associated with high deficits while ensuring responsible budgeting.
NK Singh Committee The NK Singh Committee was established to propose measures for fiscal discipline. It recommended specific deficit targets, which were disrupted by the COVID-19 pandemic and economic challenges.
Fiscal Deficit A fiscal deficit occurs when a government’s expenditures surpass its revenues. This situation often leads to borrowing or money printing, potentially causing inflation and economic instability.
Economic Support vs. Discipline Balancing economic support with fiscal discipline is challenging. The government’s approach to managing deficits will influence India’s long-term economic stability and growth prospects.

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