Introduction
Fiscal deficit represents the excess of the government's total expenditure over its non-debt receipts, indicating total sovereign borrowing requirements. The Union Budget targeted a fiscal deficit of 4.9% of GDP for FY25, adhering to a glide path aiming to bring it below 4.5% by FY26.
Factors Contributing to High Fiscal Deficit
- Committed Outlays and Debt Servicing: A significant portion of revenue receipts is pre-committed, with interest payments consuming approximately 24% of total budget expenditure and nearly 37% of revenue receipts, alongside inflexible food and fertiliser subsidy burdens.
- Narrow Tax Base: India's central tax-to-GDP ratio remains modest at around 11.7%, constrained by extensive economic informality, significant agricultural exemptions, and non-compliance.
- Counter-Cyclical Capital Expenditure Push: Sustained public investment in infrastructure to crowd in private capital led to a capital outlay expansion to ₹11.11 lakh crore (3.4% of GDP) in FY25.
Potential Consequences of Elevated Fiscal Deficit
- Crowding-Out Effect: Large sovereign borrowings absorb domestic loanable funds, tightening financial market liquidity and raising borrowing costs for private corporate investments.
- Developmental Trade-Offs: With combined general government debt at approximately 82% of GDP, high debt servicing obligations constrain fiscal space for essential social infrastructure such as health, education, and social security.
- Macroeconomic Vulnerabilities: Persistent high deficits pose inflationary risks, suppress sovereign credit rating upgrades, and leave limited counter-cyclical fiscal headroom during external economic shocks.
Measures to Ensure Fiscal Consolidation
- Revenue Mobilisation: Rationalise GST rate structures by eliminating inverted duty structures, curtail tax exemptions, and leverage big data analytics and AI to counter tax evasion.
- Expenditure Rationalisation: Eliminate non-merit subsidies, expand Direct Benefit Transfers (DBT) with Aadhaar-enabled authentication to prune leakages, and enforce sunset clauses on redundant Centrally Sponsored Schemes.
- Institutional Strengthening: Operationalise the recommendations of the N.K. Singh Committee by establishing an independent Fiscal Council to assess macroeconomic projections and anchoring targets to a 60% general government debt-to-GDP ratio.
Conclusion
Achieving fiscal consolidation requires a judicious balance between revenue mobilisation and prudent expenditure pruning without compromising productive capital formation. Anchoring debt sustainability to institutional guardrails will ensure macro-financial stability while supporting resilient and inclusive economic growth.