Debt, not deficit, to be fiscal health check parameter

New Delhi: 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 per cent of gross domestic product (GDP), lower than the interim budget estimate of 5.1 per cent 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 per cent 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 per cent , 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 per cent 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 per cent of total expenditure, although this remains below the 24 per cent 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 per cent of GDP over the next three years, down from 89.3 per cent in fiscal 2020-21.