<p>Covid-19 has disrupted the fiscal consolidation roadmap of the Union Government as well as state governments. Federal governments are trying to bring back public finances on the fiscal consolidation path as laid down in the Fiscal Responsibility and Budget Management (FRBM) Act and state-specific Fiscal Responsibility Acts. </p><p>The FRBM Act mandates the Union Government to cap the fiscal deficit below 3% of Gross Domestic Product (GDP) and keep the revenue account balanced. Total liabilities of the Union Government shall be kept below 40% of GDP as per this Act. </p><p>Fiscal deficits are the difference between revenue receipts, non-debt capital receipts, and total expenditure. Revenue deficit is the difference between revenue receipts and revenue expenditure. Many studies have observed that higher fiscal deficits and debt beyond numerical ceilings will affect the macro-economy adversely by way of retarding economic growth, creating inflationary pressure, and rising the interest and exchange rates.</p>.<p>Numerical ceilings are laid down in the FRBM Act considering the ‘golden rule’ of public finance. The rule implies that all the borrowings shall be invested in capital formation. If the revenue account is balanced or in surplus, whole borrowings shall be devoted to capital formation. However, at present, the revenue deficit constitutes 37% of the fiscal deficit. </p><p>This is as per the 2024-25 budget estimates and changes as per the revenue and expenditure situation at the end of the financial year. It implies that the government is resorting to borrowing to meet its current expenditure. The situation is true for many state governments with few exceptions. This trend usually takes off the money available for the much-needed capital push.</p>.<p>The Union Budget 2025-26 will be presented soon. The current expenditure of the Union Government may increase further in the upcoming financial year as the government is setting up the 8th Pay Commission to revise the salaries and pensions of Central Government employees. Though the implementation of recommendations takes time, it will add to the increasing committed expenditure in the next financial year. This may further reduce the fiscal space available for capital investments. </p><p>The Union Government could reduce the fiscal deficits and revenue deficits during FY 2023-24 with a substantial increase in transfers of the Reserve Bank of India’s (RBI) dividend of Rs 2,10,874 crore. This constituted 13% of fiscal deficits and 28% of revenue deficits during 2023-24. The amount was Rs 87,416 crore during FY 2022-23 and it constituted 5% of fiscal deficits.</p>.<p><strong>Tax mobilisation</strong></p>.<p>On the revenue front, though the net Goods and Services Tax (GST) mobilisation is growing positively, it is less than the budget estimate of 11% for FY 2024-25. During the first nine months of FY 2024-25, the net GST mobilisation has grown at 9.2%. This trend may result in less-than-estimated GST revenue mobilisation for 2024-25, adding to the fiscal deficits. It is expected that the government may come out with plans to give an impetus to consumption expenditure in the Union Budget 2025-26. </p><p>Net direct tax collection till January 12, 2025 has grown at 15.8%, indicating a positive sign. More simplification of direct tax payment procedures, and rationalisation of slabs to give more disposable income to the middle-income population may further enhance direct tax mobilisation. This step will also help in increasing GST mobilisation with a boost to consumption expenditure.</p>.<p>Recent trends in economic growth are expected to pose challenges for the 2025-26 Union Budget preparation. Economic growth in the first two quarters of FY 2024-25 turned out to be much lower than anticipated. The RBI Monetary Policy Committee in its December report has projected the country’s real GDP growth to be 6.6%. However, for the fiscal projections in the 2024-25 Union Budget, RBI’s projection of 7.2% economic growth has been adopted. </p><p>A decline in growth will further affect revenue mobilisation and demand more government spending to revive the economy. A declining growth rate implies that the economy needs an investment push to revive the growth. </p><p>The government needs to review sector-wise economic growth trends and prioritise its policy measures to boost those sectors. For instance, the share of the manufacturing sector in the total national income has remained almost stagnant for many years. Agriculture and manufacturing sectors have high employment potential; their revival could enhance long-term economic growth.</p>.<p>The government has its task cut out as it braces for the challenge of balancing fiscal consolidation and providing an expenditure push to the economy. The growth in private investment, and its potential boost to the economy, will depend on the government’s efficiency in solving this puzzle.</p>.<p><em>(The writer is an assistant professor of economics at the School of Social Sciences, M S Ramaiah University of Applied Sciences)</em></p>
<p>Covid-19 has disrupted the fiscal consolidation roadmap of the Union Government as well as state governments. Federal governments are trying to bring back public finances on the fiscal consolidation path as laid down in the Fiscal Responsibility and Budget Management (FRBM) Act and state-specific Fiscal Responsibility Acts. </p><p>The FRBM Act mandates the Union Government to cap the fiscal deficit below 3% of Gross Domestic Product (GDP) and keep the revenue account balanced. Total liabilities of the Union Government shall be kept below 40% of GDP as per this Act. </p><p>Fiscal deficits are the difference between revenue receipts, non-debt capital receipts, and total expenditure. Revenue deficit is the difference between revenue receipts and revenue expenditure. Many studies have observed that higher fiscal deficits and debt beyond numerical ceilings will affect the macro-economy adversely by way of retarding economic growth, creating inflationary pressure, and rising the interest and exchange rates.</p>.<p>Numerical ceilings are laid down in the FRBM Act considering the ‘golden rule’ of public finance. The rule implies that all the borrowings shall be invested in capital formation. If the revenue account is balanced or in surplus, whole borrowings shall be devoted to capital formation. However, at present, the revenue deficit constitutes 37% of the fiscal deficit. </p><p>This is as per the 2024-25 budget estimates and changes as per the revenue and expenditure situation at the end of the financial year. It implies that the government is resorting to borrowing to meet its current expenditure. The situation is true for many state governments with few exceptions. This trend usually takes off the money available for the much-needed capital push.</p>.<p>The Union Budget 2025-26 will be presented soon. The current expenditure of the Union Government may increase further in the upcoming financial year as the government is setting up the 8th Pay Commission to revise the salaries and pensions of Central Government employees. Though the implementation of recommendations takes time, it will add to the increasing committed expenditure in the next financial year. This may further reduce the fiscal space available for capital investments. </p><p>The Union Government could reduce the fiscal deficits and revenue deficits during FY 2023-24 with a substantial increase in transfers of the Reserve Bank of India’s (RBI) dividend of Rs 2,10,874 crore. This constituted 13% of fiscal deficits and 28% of revenue deficits during 2023-24. The amount was Rs 87,416 crore during FY 2022-23 and it constituted 5% of fiscal deficits.</p>.<p><strong>Tax mobilisation</strong></p>.<p>On the revenue front, though the net Goods and Services Tax (GST) mobilisation is growing positively, it is less than the budget estimate of 11% for FY 2024-25. During the first nine months of FY 2024-25, the net GST mobilisation has grown at 9.2%. This trend may result in less-than-estimated GST revenue mobilisation for 2024-25, adding to the fiscal deficits. It is expected that the government may come out with plans to give an impetus to consumption expenditure in the Union Budget 2025-26. </p><p>Net direct tax collection till January 12, 2025 has grown at 15.8%, indicating a positive sign. More simplification of direct tax payment procedures, and rationalisation of slabs to give more disposable income to the middle-income population may further enhance direct tax mobilisation. This step will also help in increasing GST mobilisation with a boost to consumption expenditure.</p>.<p>Recent trends in economic growth are expected to pose challenges for the 2025-26 Union Budget preparation. Economic growth in the first two quarters of FY 2024-25 turned out to be much lower than anticipated. The RBI Monetary Policy Committee in its December report has projected the country’s real GDP growth to be 6.6%. However, for the fiscal projections in the 2024-25 Union Budget, RBI’s projection of 7.2% economic growth has been adopted. </p><p>A decline in growth will further affect revenue mobilisation and demand more government spending to revive the economy. A declining growth rate implies that the economy needs an investment push to revive the growth. </p><p>The government needs to review sector-wise economic growth trends and prioritise its policy measures to boost those sectors. For instance, the share of the manufacturing sector in the total national income has remained almost stagnant for many years. Agriculture and manufacturing sectors have high employment potential; their revival could enhance long-term economic growth.</p>.<p>The government has its task cut out as it braces for the challenge of balancing fiscal consolidation and providing an expenditure push to the economy. The growth in private investment, and its potential boost to the economy, will depend on the government’s efficiency in solving this puzzle.</p>.<p><em>(The writer is an assistant professor of economics at the School of Social Sciences, M S Ramaiah University of Applied Sciences)</em></p>
