Introduction

In her Budget speech, FM revealed the government’s plans to reduce the fiscal deficit to 5.1% of GDP in 2024-25 and below 4.5% by 2025-26, surprising many analysts who expected slightly higher deficit targets.
This article explains fiscal deficit, its significance, how the government funds it, and the implications of reducing the deficit.

What is Fiscal Deficit?

Definition: Fiscal deficit represents the gap between a government’s revenue and its expenditure. When expenses exceed revenues, the government must borrow money or sell assets to cover the deficit.
Revenue Sources: Taxes are the primary source of government revenue. In 2024-25, tax receipts are expected to be ₹26.02 lakh crore, while total revenue is estimated at ₹30.8 lakh crore. Total government expenditure for the same period is projected at ₹47.66 lakh crore.

Borrowing: To finance the fiscal deficit, the government borrows money from the bond market, where lenders compete to purchase government-issued bonds.
Central Banks: Central banks, such as the Reserve Bank of India (RBI), play a significant role in the credit market by purchasing government bonds in the secondary market, indirectly providing funds to the government.
Borrowing Amount: In 2024-25, the Centre aims to borrow ₹14.13 lakh crore from the market, lower than the target for 2023-24.

Inflation: High fiscal deficits can lead to inflation, as the government may resort to printing money to fund the deficit.
Market Confidence: Fiscal discipline, reflected in lower deficits, can boost confidence among lenders, potentially improving bond ratings and reducing borrowing costs.
Debt Management: A high fiscal deficit can strain the government’s ability to manage public debt. India’s public debt may rise significantly, affecting the country’s fiscal health.
International Borrowing: A lower fiscal deficit may make it easier for the government to issue bonds overseas and access cheaper credit.

Reducing Fiscal Deficit: The government plans to lower the fiscal deficit to 5.1% of GDP in 2024-25. It aims to achieve this primarily through increased tax collections, expecting a rise of 11.5%.
Balancing Act: Balancing the budget through tax hikes could dampen economic growth, but achieving the ambitious fiscal deficit target remains uncertain.

Fiscal deficit, the gap between government revenue and expenditure, holds significant implications for inflation, market confidence, debt management, and international borrowing.
The government’s plan to reduce the fiscal deficit in the coming years involves a delicate balance of revenue generation and expenditure control.