How has India lowered its fiscal deficit estimate to 4.9% of GDP

Source: The post how has India lowered its fiscal deficit estimate to 4.9% of GDP has been created, based on the article “Deficit numbers signal: PRUDENT PATH” published in “Live Mints” on 24th July 2024

UPSC Syllabus Topic: GS Paper3- Indian Economy – Fiscal Consolidation in India

Context: The article discusses how Finance Minister Nirmala Sitharaman lowered India’s fiscal deficit estimate to 4.9% of GDP for the current financial year. This was achieved through increased revenue receipts and controlled spending, with significant contributions from higher RBI dividends and reduced subsidies.

For detailed information on Fiscal Deficit in India read this article here

What is the current status of India’s fiscal deficit?

1. Fiscal Deficit Estimate: Reduced to 4.9% of GDP from 5.1%.
2. Absolute Terms: Projected at ₹16.13 trillion, down from ₹16.85 trillion.
3. Future Target: Fiscal deficit to be below 4.5% by FY26, with a declining central government debt to GDP ratio from FY27.

How has India lowered its fiscal deficit estimate to 4.9% of GDP for the current financial year?

1. Revenue Receipts Growth: Revenue receipts are projected to increase by 14.7%, reaching ₹31.29 trillion.                                                                                                      a) RBI Dividend: A major boost came from the Reserve Bank of India’s dividend, which was ₹11 trillion, a 141% increase from the previous year.
2. Controlled Spending: Total government expenditure is set at ₹48.21 trillion, marking an 8.5% rise from the previous year.

a) Capital Expenditure: Maintained at ₹11 trillion, showing a focus on long-term investments.

b) Reduced Subsidies: Lower subsidy spending has been crucial.

1. Fertilizer Subsidy: Reduced by 13% to ₹1.64 trillion.
2. Food and Petroleum Subsidies: Also saw reductions from FY24 levels.

c) Market Borrowing: The gap between receipts and spending will be partly financed by borrowing ₹11.63 trillion from the market, slightly less than the ₹11.75 trillion projected earlier.

What are the impacts of this change?

1. Market Confidence: The lowered fiscal deficit sends a strong signal of fiscal prudence to markets and rating agencies.
2. Bond Yields: Initially, government bond yields fell to 6.93% but later stabilized at 6.97%.
3. Revenue Growth: Higher revenue receipts, boosted by a ₹2.11 trillion RBI dividend, contribute positively to fiscal health.
4. Future Fiscal Targets: Commitment to reducing the deficit below 4.5% by FY26 ensures a stable economic outlook.

Question for practice:

Examine how India’s fiscal deficit estimate has been adjusted and the key measures taken to achieve this reduction.