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  1. Budget 2024: Here’s why all eyes will be on fiscal deficit target

Budget 2024: Here’s why all eyes will be on fiscal deficit target

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4 min read • Updated: January 23, 2024, 1:19 PM

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In an election year, the government may attempt to maintain fiscal prudence while also focusing on the popular welfare schemes.

All eyes will be on Nirmala Sitharaman’s announcements on fiscal deficit.

As Budget 2024 is round the corner, it is important to understand something that sounds fancy but is actually key to the government’s financial health – fiscal deficit. Ahead of the Union Budget, there is a buzz that the government is likely to narrow down the fiscal deficit for the financial year 2024-25. In an election year the government may attempt to maintain fiscal prudence while also focusing on the popular welfare schemes. Amid the speculations, the experts would keep a watch on Finance Minister Nirmala Sitharaman’s announcements on capital expenditure and fiscal deficit during the Interim Budget presentation on February 1.

Fiscal deficit is a crucial factor in the economic game that shapes the whole country's finances. Before getting into why the fiscal deficit target will be in focus in Budget 2024, let's take a look at what it means and why it matters to all.

What is fiscal deficit?

Fiscal deficit is the difference between how much the government spends and how much it rakes in (excluding borrowed money) during a year. Picture this: total spending, including regular expenses and investments, minus what the government receives from taxes and other sources. If spending tops earnings (minus borrowing), then you have a fiscal deficit. Fiscal deficit is the key indicator that shows the shortfall of funds to meet the government expenses in a year. The shortfall indicates how much the government may borrow in the given financial year.

Budget 2024: What is the buzz around the fiscal deficit?

Now, let's peek into the crystal ball for Budget 2024. Last time, the government went all-in on spending, especially in infrastructure push like building roads and bridges. But this time? Reports suggest that the government is likely to tighten the spending a bit. According to a poll of economists by Reuters the government is expected to reduce the fiscal deficit target to 5.3% of GDP in FY 2024-25, with infrastructure, rural development, and job creation taking the spotlight. The capital expenditure in the country has skyrocketed by more than 33% this fiscal year, crossing the $120 billion mark. The experts believe that the capital expenditure will keep climbing, maybe by another 15% in the coming fiscal year, according to experts.

Amid the speculations over the government striking a balance between the fiscal consolidation and spending on welfare schemes in an election year, reports indicate that fiscal deficit is likely to hit 6%. According to a report by India Ratings and Research, India's fiscal deficit might go past the 5.9% of GDP goal this year, maybe even hit 6%. The reason is there is a likelihood of revenue spending exceeding the Budget Estimate by about ₹2 lakh crore.

And check this out – Parliament recently gave the nod for some extra spending this year, throwing in an extra ₹53,378 crore. So now, the government's total spending commitment for FY 2023-24 stands at ₹45.6 lakh crore. Out of this, ₹10.1 lakh crore is for the 'capital expenditure.'

Here’s why the extra spending has made the experts curious?

The government allocated more cash at important schemes like food security, fertiliser subsidy, LPG subsidy, and the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). For the MGNREGS alone, the government has already splurged nearly ₹80,000 crore by mid-December, blowing past the estimated ₹60,000 crore. The government is also infusing another ₹14,524 crore.

Impact of higher fiscal deficit

To put it simply, having a bit of deficit isn't bad – it can boost economic growth. But too much? That's when things become problematic. More government borrowing might elbow private investment out, raise interest rates and then you have inflation. With the crisis in West Asia, it might just be prudent to keep the deficit in check, as oil prices may go up at any time.

So, here’s how the experts see the government’s move on the fiscal deficit. It may not be smooth sailing while balancing social goals with fiscal prudence. Too much borrowing could also lead to a financial tightrope walk. Finding that sweet spot between boosting growth and keeping the money game strong is precisely the challenge.