Stick to fiscal deficit as the norm for fiscal prudence

Government expenditures exceeding revenue by a high margin can lead to a difficult situation. In the 1980s, rising fiscal deficit accompanied by rising government debt led to a difficult balance of payments situation and a high ratio of interest payment to revenue receipts. With these levels of fiscal deficit in two consecutive years, the Centre’s debt-GDP ratio is estimated at 54% in 2025-26, assuming a nominal GDP growth of 10.5% in these two years. In this context, the Twelfth Finance Commission had observed, “The transferable savings of the household sector of 10 per cent of GDP combined with an acceptable level of current account deficit of 1.5 per cent would be adequate to provide for a government fiscal deficit of 6 per cent, an absorption by the private corporate sector of 4 per cent, and by non-departmental public enterprises of 1.5 per cent of GDP.” The recent tendency is for household financial savings to come down. In India’s context, if the debt-GDP ratio remains relatively high compared to the norms given in the FRLs of the Centre and States, the ratio of interest payment to revenue receipts would also remain high, pre-empting government’s revenue receipts while leaving progressively lower shares for financing non-interest expenditures.