Debt, not deficit, to be fiscal health check parameter

Centre on Tuesday indicated a major transition from using

fiscal deficit

as a measure of

fiscal health

to

debt-GDP ratio

being the anchor of fiscal management in the coming years as it vowed to stick to its

fiscal consolidation

plan and kept the

deficit

at 4.9% of gross domestic product (GDP), lower than the interim budget estimate of 5.1% for 2024-25.

“Hereafter, it is not the intention to focus on a deficit number, but look at what will reduce our debt-GDP ratio in normal years. The reason for this is a fixed figure enshrined in the

FRBM Act

does not take into account the

debt dynamics

of a

fast-growing economy

like India,” finance secretary T V Somanathan told a news conference.
He said the 3% target is often attributed to the Maastricht Treaty in Europe, but the growth rate of those countries are very low. India is the fastest-growing major economy in the world and the deficit it can support in a particular year without expanding its debt is not necessarily 3%, but much more. Each year’s calibration will be based on what will be the debt that will keep it on a reducing path, Somanathan added. While this will require amendments to the FRBM Act, the move has not been taken up for now.
Sitharaman said in her Budget speech, “The fiscal consolidation path announced by me in 2021 has served our economy very well, and we aim to reach a deficit below 4.5% next year. The govt is committed to staying the course. From 2026-27 onwards, our endeavour will be to keep the fiscal deficit each year such that the central govt debt will be on a declining path as percentage of GDP.”

Robust tax revenues and higher dividend payout of Rs 2.11 lakh crore by the Reserve Bank of India has also helped govt in its fiscal consolidation plan.
The move to persist with fiscal consolidation was cheered by ratings agencies.
“Policy continuity is reflected in govt’s capital spending on infrastructure which remains around 23% of total expenditure, although this remains below the 24% spending on interest payments,” said Gene Fang, associate managing director, Moody’s Ratings. Moody’s Rating said it projects general govt debt to stabilise above 80% of GDP over the next three years, down from 89.3% in fiscal 2020-21.