Adapting to a new fiscal anchor

The impact of the rationalisation and reduction in goods and services tax rates on growth and tax collections will be carefully studied by the Ministry of Finance, which has likely started preparation for the next Union Budget.

- RAJESH KUMAR

However, this will not be the only aspect that financial markets and other stakeholders will watch closely. From the next financial year, the government will shift to a different fiscal anchor. Since this may require adjustments in financial market expectations, a few broad issues will need to be debated over the coming months.

In the 2024-25 (July) Budget, Union Finance Minister Nirmala Sitharaman announced that from 2026-27 onwards, the government will aim to keep the annual fiscal deficit such that the Union government's debt will be on a declining path as a percentage of gross domestic product (GDP). Thus, the government’s focus will be on debt. Notably, the Fiscal Responsibility and Budget Management (FRBM) Act was amended in 2018 to include both debt and deficit targets. Fiscal deficit was targeted to decline to 3 per cent of GDP by 2020-21, while central government debt was targeted to be reduced to 40 per cent of GDP by 2024-25. The path was severely disrupted by the Covid-19 pandemic, which increased both the fiscal deficit and public debt significantly. However, to its credit, the government has made a remarkable recovery since.