Question 121
What is the projected fiscal deficit for FY2025-26 as per the Union Budget 2025-26?
- AOption (a)
5.1% of GDP
- BOption (b)
4.8% of GDP
- COption (c)
3.9% of GDP
- DOption (d)
4.4% of GDP
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Correct answer
4.4% of GDP
Why this answer is correct
The correct answer is 4.4% of GDP.
Key Points
- The Union Budget 2025-26 was presented by the Union Minister of Finance, Nirmala Sitharaman, in the Parliament of India.
- For the Financial Year 2025-26, the government has projected the fiscal deficit at 4.4% of the Gross Domestic Product (GDP).
- This target is part of a broad fiscal consolidation roadmap aimed at bringing the deficit down to a sustainable level below 4.5% of GDP.
- In the previous fiscal year, FY 2024-25, the Revised Estimate (RE) for the fiscal deficit was recorded at 4.9%, demonstrating a steady downward trend from the Budget Estimate (BE) of 5.1%.
- The reduction to 4.4% reflects the government's commitment to balancing macroeconomic stability with the need for high capital expenditure to spur economic growth.
Additional Information
- Fiscal Deficit: This is the difference between the government's total expenditure and its total non-debt receipts (which include revenue receipts and non-debt capital receipts like recovery of loans). It indicates the total borrowing requirements of the Government of India.
- Revenue Deficit: This occurs when the revenue expenditure exceeds the revenue receipts. It implies that the government is borrowing to meet its current consumption needs rather than for investment or asset creation.
- Primary Deficit: This is calculated by deducting interest payments on previous debts from the fiscal deficit. It shows the amount of borrowing needed to meet expenditures other than interest obligations.
- FRBM Act, 2003: The Fiscal Responsibility and Budget Management Act was introduced to ensure long-term macroeconomic stability by setting targets for the reduction of fiscal and revenue deficits.
- Financing the Deficit: The government typically finances the fiscal deficit through market borrowings (issuing dated securities and treasury bills), external debt, and drawing from small savings funds.
Important Points
- The Union Budget 2025-26 continues to prioritize Capital Expenditure (Capex), which is vital for building infrastructure such as highways, railways, and digital networks.
- A lower fiscal deficit helps in keeping inflation under control and prevents the "crowding out" effect, ensuring that more credit is available for the private sector.
- The Tax-to-GDP ratio is expected to improve in 2025-26 due to better GST compliance and a wider direct tax base, contributing to the consolidation process.
- The government intends to stick to the fiscal glide path to eventually reduce the debt-to-GDP ratio, which is a key metric for international credit rating agencies.