Background:

• Union Finance Minister Nirmala Sitharaman announced during her Budget speech that the Centre would reduce its fiscal deficit to 4.9% of gross domestic product (GDP) in 2024-25. She further added that the fiscal deficit would be reduced to below 4.5% of GDP by 2025-26.
• These goals put India in a path of fiscal consolidation. Fiscal consolidation describes government policy intended to reduce deficits and the accumulation of debt.
• Fiscal deficit refers to the shortfall in a government’s revenue when compared to its expenditure. When a government’s expenditure exceeds its revenues, the government will have to borrow money or sell assets to fund the deficit.
• The fiscal deficit should not be confused with the national debt. The national debt is the total amount of money that the government of a country owes its lenders at a particular point in time. 
• The national debt is usually the amount of debt that a government has accumulated over many years of running fiscal deficits and borrowing to bridge the deficits. 
• In order to fund its fiscal deficit, the government mainly borrows money from the bond market where lenders compete to lend to the government by purchasing bonds issued by the government. 
• The Fiscal Responsibility and Budget Management Act (FRBM Act), establishes financial discipline to reduce fiscal deficit. 
• The FRBM Act aims to introduce transparency in India’s fiscal management systems. The Act’s long-term objective is for India to achieve fiscal stability and to give the Reserve Bank of India (RBI) flexibility to deal with inflation in India.

Measures for Fiscal Consolidation in Budget 2024-25:

• Prudent Revenue and Expenditure Management: Despite rise in tax revenues in recent years, the budget has allocated additional resources towards fiscal consolidation rather than solely increasing expenditures. This cautious approach helps in reducing the deficit.
• Rationalisation of Tax Expenditures: The budget proposes a review of the Income Tax Act to simplify the tax code and reduce litigation, potentially leading to more efficient tax collection and compliance, thereby improving fiscal outcomes.
  • The budget proposes to introduce a ‘Vivad se Vishwas, 2024’ scheme to reduce the amount of revenue locked in litigation.
• Utilisation of RBI Surplus: The budget uses the surplus received from the Reserve Bank of India to support fiscal consolidation efforts. This includes managing expenditures and reducing the fiscal deficit.
• Limiting Borrowings: The budget maintains a restraint on borrowings by Central Public Sector Enterprises (CPSEs), keeping it flat at 1.1% of GDP. This control helps manage the overall public sector deficit.
• Recalibration of Tax Rates and Duties: Proposals for rationalising GST rates and recalibrating customs duties aim to optimise tax revenues and reduce market distortions, contributing to a more stable fiscal environment.
• Debt Management: A focus on reducing the central government’s debt-to-GDP ratio from 58.2% to 56.8%. The government aims to place sovereign debt on a declining path as a percentage of GDP, ensuring better fiscal health.
• Primary Deficit Control: The primary deficit (fiscal deficit excluding interest payments) is projected to be only 1.4% of GDP for FY25, reflecting disciplined fiscal management.

Conclusion:

• Putting the economy in the path of fiscal consolidation can help in forming a base for long term economic growth.

Source:

https://indianexpress.com/article/opinion/columns/budget-2024-india-economy-five-year-roadmap-9471237/ 

https://indianexpress.com/article/opinion/columns/sajjid-chinoy-writes-budget-makes-a-beginning-in-fixing-economys-plumbing-implementation-is-key-9471689/ 

https://www.thehindu.com/business/Economy/why-is-fiscal-consolidation-so-important-explained/article67808867.ece