New fiscal policy questions

The first Union Budget of the third Narendra Modi government, presented last week by Union Finance Minister Nirmala Sitharaman, improved the fiscal deficit target for the ongoing financial year by 20 basis points to 4.9 per cent of gross domestic product (GDP), compared to the Interim Budget presented in February.

- RAJESH KUMAR

This reflected the Union government's commitment to fiscal consolidation. Even in the last financial year (2023-24), the government restricted the fiscal deficit to 5.6 per cent of GDP, compared to the Budget estimate of 5.9 per cent. Better than expected revenue collection, coupled with realistic Budget assumptions, has helped the government in recent years. It is on course to meet the medium-term target of reducing the fiscal deficit to below 4.5 per cent of GDP by 2025-26.

The government must be commended for adhering to the fiscal glide path, which looked difficult when it was first announced in 2021. Given the fiscal performance in recent years, the government was expected to announce a new medium-term path. Although the Budget did indicate how the government will approach fiscal management in coming years, it raised several questions, which must be debated. Ms Sitharaman in her Budget speech noted: "From 2026-27 onwards, our endeavour will be to keep the fiscal deficit each year such that the Central Government debt will be on a declining path as percentage of GDP." Since India's public debt increased significantly after the pandemic and remains a source of vulnerability, targeting a consistent reduction in the debt-to-GDP ratio is an apt fiscal goal.