Fiscal Deficit and Fiscal Jurisprudence
Introduction
The article emphasizes the importance of fiscal prudence and the dangers of excessive fiscal deficits. It highlights the historical consequences of high deficits, including balance of payments issues and increased debt burdens.
The recent Union Budget’s focus on reducing fiscal deficit is analyzed, along with the implications for the debt-GDP ratio and the private sector.
- Historical Lessons: The article cites the 1980s as a period when rising fiscal deficit and government debt led to economic difficulties.
- Budgetary Targets: The Union Budget aims to reduce fiscal deficit to 4.5% of GDP in 2025-26 and maintain a declining debt-GDP ratio.
- Debt-GDP Ratio: The Centre’s debt-GDP ratio is projected to reach 54% in 2025-26.
- Abandonment of FRBM Targets: The government has effectively abandoned its previous debt-GDP targets, focusing instead on a declining path.
- Impact on Private Sector: High fiscal deficits can limit the investible surplus available to the private sector, potentially hindering growth.
- Household Financial Savings: Declining household financial savings further constrain the available investible surplus.
- International Comparison: The article compares India’s interest payments to revenue receipts with other countries, highlighting India’s relatively high levels.
- Challenges of Debt Reduction: Reducing debt-GDP ratio can be difficult, especially in the face of macroeconomic shocks.
Conclusion
The article concludes that maintaining fiscal prudence is crucial for India’s economic stability. The government should adhere to a limit of 3% of GDP for fiscal deficit to ensure sustainable debt levels and provide adequate space for the private sector to thrive.
Mains Practice Question |
Discuss the implications of high fiscal deficits on India’s economy. How can the government balance the need for public spending with the goal of fiscal prudence? |
