Why in NEWS
The Government of India successfully achieved its fiscal deficit target of 4.8% of GDP for FY 2024–25, as per provisional data by the Controller General of Accounts (CGA). This reflects strong fiscal discipline amid rising expenditure needs.
Key Terms and Concepts Simplified
| Key Term | Explanation |
|---|---|
| Fiscal Deficit | The gap between the government’s total expenditure and its total revenue (excluding borrowings). Indicates how much the government needs to borrow. |
| Controller General of Accounts (CGA) | The Principal Accounting Adviser to the Government. Manages national accounting systems and audits public finances. |
| Revenue Receipts | Income from taxes and non-tax sources like fees, dividends, etc. |
| Capital Receipts | Funds from disinvestment, recovery of loans, and borrowings. |
| Primary Deficit | Fiscal Deficit minus interest payments on earlier debt. |
| Effective Revenue Deficit | Revenue Deficit minus grants used for asset creation. |
| Fiscal Consolidation | Policy to reduce government deficit and debt accumulation. |
| Glide Path | A step-by-step fiscal deficit reduction strategy adopted post-COVID. |
| FRBM Act | Fiscal Responsibility and Budget Management Act, 2003 – ensures fiscal discipline. |
| Capex | Capital expenditure for infrastructure and asset creation. |
| Twin Deficit | Occurs when a country has both a fiscal deficit and a current account deficit. |
Key Points of the News
- India met its FY 2024–25 fiscal deficit target of 4.8% of GDP.
- Fiscal deficit stood at ₹15.77 lakh crore.
- Total expenditure: ₹46.55 lakh crore
- Revenue Expenditure: ₹36.03 lakh crore
- Capital Expenditure: ₹10.52 lakh crore
- Total revenue receipts: ₹30.78 lakh crore
- India aims to reduce fiscal deficit further to 4.4% in FY 2025–26.
- India’s outstanding national debt projected to rise to ₹196.78 lakh crore by March 2026.
Factors Influencing Fiscal Deficit
- Fiscal Policy: Expansionary policies increase deficit; contractionary reduce it.
- Economic Cycles: Recessions increase deficits; booms reduce them.
- Unexpected Events: Wars, disasters increase spending needs.
- Tax Collection Efficiency: Weak systems widen the deficit.
- Global Factors: Commodity prices, inflation, trade shifts impact revenues and spending.
India’s Fiscal Consolidation Efforts
- FRBM Act (2003): Legal framework for fiscal discipline.
- Glide Path: Gradual reduction from 6.7% (2020-21) to 4.8% (2024–25).
- Boosted Capex: From 1.6% of GDP (2014-15) to 3.1% (2025–26 target).
- Revenue Growth: Direct tax collection up by 16.15% in FY 2024–25.
- State-Level FRLs: Encouraging states to maintain fiscal discipline.
Visual Representation
Flowchart: Fiscal Deficit Components
TOTAL EXPENDITURE
↓
- TOTAL RECEIPTS (Excl. Borrowings)
↓
= FISCAL DEFICIT
↓
Requires Borrowing → Adds to National Debt → Leads to Interest Payments
In a Nutshell (Mnemonic for Quick Recall)
“DEFICIT GPS”
- D – Debt burden rises
- E – Expenditure > Receipts
- F – Fiscal Policy matters
- I – Inflation risk rises
- C – Crowding out private investment
- I – Interest load increases
- T – Targets under FRBM
- G – Glide path to reduce deficit
- P – Primary deficit excludes interest
- S – Stability requires consolidation
Prelims Questions
Q1. Which of the following correctly defines Fiscal Deficit?
- It is the gap between total revenue and capital receipts.
- It is the difference between total expenditure and total receipts excluding borrowings.
- It indicates the money the government borrows in a year.
Select the correct answer using the code below:
A. 1 and 2 only
B. 2 and 3 only
C. 2 only
D. 1, 2 and 3
Q2. Consider the following statements:
- Revenue deficit includes grants for asset creation.
- Effective revenue deficit is always higher than revenue deficit.
- Capital expenditure contributes to long-term asset formation.
Which of the above is/are correct?
A. 1 and 3 only
B. 3 only
C. 2 and 3 only
D. 1, 2 and 3
Q3. With reference to the FRBM Act, consider the following statements:
- It aims to reduce fiscal deficit and ensure macroeconomic stability.
- The 2018 amendment introduced debt-to-GDP ratio as a fiscal anchor.
- It mandates zero fiscal deficit by 2030.
Which of the statements are correct?
A. 1 and 2 only
B. 2 and 3 only
C. 1 and 3 only
D. 1, 2 and 3
Mains Questions
Q1. Examine the implications of a persistent fiscal deficit on India’s macroeconomic stability. What measures has the government taken to ensure fiscal consolidation?
Q2. (PYQ – UPSC Mains GS-3, 2020) “Explain the rationale behind the Goods and Services Tax (GST) and discuss its impact on Indian fiscal federalism.”
Answers to Prelims Questions
| Q No | Answer | Explanation |
|---|---|---|
| Q1 | B | Statement 2 and 3 are correct. Fiscal deficit is calculated excluding borrowings and it shows the borrowing needs. Statement 1 is incorrect. |
| Q2 | B | Effective revenue deficit = Revenue deficit – asset-creating grants; hence it is lower. Only statement 3 is correct. |
| Q3 | A | Statement 1 and 2 are correct. Statement 3 is incorrect; FRBM does not mandate zero deficit by 2030. |
