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Fiscal Deficit Target for FY25

Context:

According to the experts, the Budget 2024-25 lowers fiscal deficit target to boost the investor Confidence. The government has set its fiscal deficit target for FY25 at 5.1% of GDP.

Relevance:

GS-3 Indian Economy

Dimensions of the Article:

  1. Fiscal deficit target for FY25
  2. What is fiscal deficit?

Fiscal deficit target for FY25:

  • The Indian government will lower its debt level and the fiscal deficit is to be cut to 5.1% of gross domestic product in FY25, from 5.9% in FY24.
  • The finance minister also said the fiscal deficit estimate for FY24 has been revised to 5.8% of GDP, from the 5.9% estimated earlier for the financial year.
  • Boost Investments:
    • The assurance from the government will help investors’ confidence.
    • It will improve fiscal stability as the move will ensure that sovereign yields are range-bound.

   Centre’s fiscal consolidation strategy:

  • The use of technology in tax administration
    • Information-driven voluntary compliance,
    • Greater formalisation of the economy,
    • Expanding the scope of taxes deducted or collected at source,
    • Growing tax base, and economic growth

What is fiscal deficit?

  • It is the difference between the Revenue Receipts plus Non-debt Capital Receipts (NDCR) and the total expenditure.
  • In other words, fiscal deficit is a result of the government’s total expenditures exceeding the revenue that it generates, excluding money from borrowings.
  • A significant fiscal deficit can lead to a higher national debt and increased costs related to debt servicing.
    • This can adversely affect the economy, potentially devaluing the national currency and hindering private sector investments.

What is the significance of fiscal deficit?

  • In the economy, there is a limited pool of investible savings. These savings are used by financial institutions like banks to lend to private businesses (both big and small) and the governments (Centre and state).
  • If the fiscal deficit ratio is too high, it implies that there is a lesser amount of money left in the market for private entrepreneurs and businesses to borrow.
  • Lesser amount of this money, in turn, leads to higher rates of interest charged on such lending.
  • So, simply put, a higher fiscal deficit means higher borrowing by the government, which, in turn, mean higher interest rates in the economy.
  • A high fiscal deficit and higher interest rates would also mean that the efforts of the Reserve Bank of India to reduce interest rates are undone.

-Source: Livemint


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