Road to Nowhere

The Fiscal Respon-sibility and Budget Management (FRBM) Act mandates the government to ensure the fiscal deficit does not exceed 3% of GDP in any year after 2020-21. The fiscal deficit that year was a humongous 9.2% of GDP.

- SUBHASH CHANDRA GARG

In the Budget speech for 2021-22, Finance Minister Nirmala Sitharaman assured that the fiscal deficit-to-GDP ratio would be brought down to 4.5% of GDP by 2025-26. In her Budget speech for 2024-25, the finance minister visited the subject of the fiscal consolidation path and indicated that the government's endeavour would be to keep the fiscal deficit from 2026-27 at such levels that the central government debt would be "on a declining path as percent-age of GDP".

This was a tricky policy formu-lation. The government seemed to be signalling that it would no longer adopt the 3% of GDP fiscal deficit goal and shift the deficit financing anchor from the fiscal deficit-to-GDP ratio to the debt-to-GDP ratio.

Budget 2025-26 has two standout features: first, a Rs 1 lakh crore income tax bonanza for 1 crore middle-class taxpayers which will hollow out the taxpayer base. And second, relegation of capital expenditure to sidelines by reducing the capital expenditure from Rs 11.11 lakh crore in the 2024-25 Budget estimate to Rs 10.18 lakh crore in the 2024-25 revised estimate, keeping only a modestly higher Budget of Rs 11.21 lakh crore for the 2025-26 Budget estimate.

In addition, from the long-term fiscal sustainability viewpoint, the scenarios presented by the finance minister to complete the unfinished business of fiscal consolidation through the debt management route is the third most important feature of Budget 2025-26.

Path to Consolidation