India’s journey towards achieving its fiscal deficit target of 4.5% of GDP for the fiscal year 2025-26 is proving to be a challenging odyssey. Fitch Ratings analysts have cast doubts on the feasibility of this goal, given the enduring impact of the COVID-19 pandemic, which led to a surge in the fiscal deficit to 9.5% of GDP in 2020/21. Despite concerted efforts to narrow the budget gap, the current deficit remains notably higher than the medium-term objective set for 2025/26.

The Fiscal Glide Path: A Strategic Approach

The focal point of the budgetary discourse is the fiscal glide path, a trajectory devised by the Finance Ministry and the government to attain self-imposed fiscal targets. This strategic approach is considered vital to prevent the adverse effects of uncontrolled budget deficits on long-term economic growth.

Proposed by the NK Singh Committee under the Narendra Modi government, the fiscal glide path outlines a gradual reduction in the fiscal deficit. The committee recommended lowering the deficit to 3% of GDP by the end of FY20, followed by further reductions to 2.8% by FY21, and ultimately reaching 2.5% by FY23.

Challenges in the Economic Landscape

Despite these well-defined targets, the current economic landscape, marked by a persistent slowdown, has impacted tax collections and government revenue sources. This situation has raised concerns about the government’s ability to meet the existing fiscal deficit target. The slowdown has posed challenges, making it difficult to generate the expected revenue to support the outlined fiscal glide path.

The Escape Clause: Flexibility Amidst Uncertainty

Recognizing the uncertainties in the economic environment, the NK Singh Committee incorporated an escape clause, allowing a deviation of up to 0.5% of GDP in extraordinary situations. This provision offers flexibility, permitting the government to exceed its target if deemed necessary to address pressing economic concerns. It acts as a safety valve, acknowledging that unforeseen circumstances may warrant a departure from the initially set fiscal path.

Implications of Deviation from Fiscal Targets

A deviation from the fiscal target carries significant implications for the overall economy. Financing deficits through measures such as printing money or excessive borrowing from central banks can lead to an increase in the money supply. This, in turn, can contribute to inflationary pressures, impacting the purchasing power of citizens and potentially destabilizing the economy.

As India grapples with the formidable task of achieving its fiscal deficit target of 4.5% of GDP for the fiscal year 2025-26, the fiscal glide path serves as a guide amid uncertain economic waters. The escape clause provides a necessary degree of flexibility, acknowledging the challenges posed by unforeseen circumstances such as the lingering effects of the COVID-19 pandemic. Striking a balance between fiscal discipline and responsiveness to economic realities will be crucial in charting a sustainable course for India’s economic future.