Central Government Fiscal Deficit
Source: CMIE Economic Outlook, 1 Finance Research
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What does the Central Government Fiscal Deficit data represent?
- The Central Government Fiscal Deficit data quantifies the difference between the central government's total expenditures and its total revenues (excluding borrowings) over a specific period. A fiscal deficit occurs when the government's expenditure exceeds its revenue.
- This data, expressed as a percentage of the country's nominal Gross Domestic Product (GDP), provides a relative measure of the deficit, offering a clearer perspective on the government's financial health in the context of the overall size of the economy.
What is the significance of the Central Government Fiscal Deficit data?
- Fiscal deficit as % of GDP is a crucial ratio for assessing a government's financial health and its economic policies. The size of the fiscal deficit in relation to GDP reflects the government's fiscal policy stance.
- The fiscal deficit influences the central bank's monetary policy, particularly in terms of managing inflation and interest rates. The ratio helps in assessing the sustainability of government debt. Persistent high deficits can lead to an unsustainable increase in public debt and increase the future debt servicing burden.
- Depending on the nature of government expenditure, fiscal deficits can either stimulate or hinder economic growth. Deficit financing through borrowing can stimulate demand, but excessive borrowing can crowd out private investment.
- The fiscal deficit as a percentage of GDP can impact a country's external balances and foreign exchange rates, especially if a significant portion of the deficit is financed through foreign borrowing.
- The trend helps to understand the government's fiscal policy over time, its economic implications and credibility of the government.
How to interpret the Central Government Fiscal Deficit data ?
- A higher deficit might indicate expansionary fiscal policies aimed at stimulating economic growth. It also suggests that the government is spending much more than it earns, which can be a concern for long-term economic stability.
- Large fiscal deficits can lead to inflationary pressures, especially if financed by printing money. They can also affect interest rates, particularly if the government borrows heavily from domestic markets.
- Assess the relationship between the fiscal deficit ratio and economic growth, considering whether deficit spending is effectively contributing to economic expansion.
- In line with the Fiscal Responsibility and Budget Management (FRBM) Act, which aimed to reduce the fiscal deficit, 13th and 14th Finance Commissions recommended a fiscal deficit target of 3% of GDP by 2014-15 and 2017-18, respectively. Following the Covid-19 outbreak, the fiscal deficit peaked to 9.2% of GDP in FY2025, hence the 15th Finance Commission in its final report “Finance Commission in COVID Times-Report for 2021-26” submitted in November 2020, has recommended a fiscal deficit target for the Union Government at 4% of the GDP by 2025-26. Each Finance Commission has taken into account the prevailing economic conditions, fiscal challenges, and policy priorities of the time in formulating their recommendations. Over the years, there has been a gradual shift towards more explicit focus on fiscal deficit targets, especially in alignment with the FRBM Act and its objectives of maintaining fiscal discipline and sustainability. Thus, while interpreting the ratio, each finance commissions’ recommendations should be taken into consideration.
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