Its Direct Impact on Daily Life is Real and Tangible

Newsreel Asia Insight #86
Dec. 28, 2023

India’s fiscal deficit is likely to exceed the 5.9% of gross domestic product (GDP) target, according to India Ratings and Research. Though by a small margin, the increase could have several implications for the Indian economy and its citizens.

The rating agency has reported that for the financial year 2023-2024, the fiscal deficit is anticipated to reach 6% of the GDP. This deficit, which arises when a government’s total expenditures exceed its generated revenue, is due to the likelihood of revenue spending surpassing the budget estimate by roughly 2 trillion rupees, as reported by The Hindu.

The rating agency highlighted that the rise in the fiscal deficit is attributable to escalated spending on employment guarantee schemes and subsidies, even amidst an upswing in tax collections, according to The Telegraph. It appears that the government may be deliberating the short-term advantages of augmented spending against the long-term consequences of an expanded fiscal deficit. This indicates a strategic approach of calculated risk, prioritising immediate socio-economic benefits, potentially influenced by the ongoing election season.

One might think it’s just about 0.1%, but in the context of a large economy like India’s, it can be quite significant. It can translate into tens of billions of rupees. A breach of the fiscal deficit target, even by a small margin, can signal to investors and markets that the government's fiscal discipline is weaker than expected. This can affect investor confidence, currency value, and the country’s borrowing costs in international markets.

While a 0.1% increase in isolation might not be drastic, fiscal deficits need to be viewed in a cumulative context. If small increases occur repeatedly over time, they can lead to a substantial rise in the overall deficit and debt levels, impacting long-term economic stability.

When a government faces a fiscal deficit, it often resorts to borrowing to bridge the gap. This increased borrowing has several ripple effects. One of the most immediate impacts is inflation. As the government pumps more borrowed money into the economy, the increased money supply can diminish the value of the currency. This can result in increased prices for imported goods, including essential commodities like oil, which in turn can have a cascading effect on the prices of various goods and services.

Another consequence is the potential rise in interest rates. To finance the deficit, the government might issue more bonds, attracting investors with higher interest rates. This, in turn, can lead to higher interest rates for loans and mortgages, affecting anyone with existing debts or those looking to borrow. On the flip side, it could mean slightly better returns for savers, but this is often overshadowed by the inflationary pressures that reduce the real value of savings.

The quality and accessibility of public services like healthcare, education and infrastructure can also take a hit. With a significant portion of government funds diverted towards servicing the debt, there’s less available for these crucial services. This can lead to a decline in the quality of life, especially for the less privileged sections of society who rely more heavily on public services.

To manage the deficit, the government might resort to measures like increasing taxes or reducing subsidies. These actions directly impact people’s finances – higher taxes can lead to reduced disposable income, while reduced subsidies can make essentials like fuel and food more expensive.

In the long run, a persistent fiscal deficit can impede economic growth. This affects employment opportunities, wages and overall economic stability, which are vital for the well-being of citizens. It’s a cycle where the deficit can lead to slower growth, which in turn can lead to a higher deficit unless effectively managed.

Fiscal deficits happen in economic cycles, and governments sometimes use them to boost growth when the economy is slow. However, it's really important to manage these deficits well to keep the economy stable and prosperous over the long term.