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Budget 2021: Sitharaman Raises Fiscal Deficit Target to 9.5%, Highest in Last 30 Years, Promises Larger Spending Against Slowdown

Nirmala Sitharaman announces Union Budget 2021 in the Lok Sabha.

Nirmala Sitharaman announces Union Budget 2021 in the Lok Sabha.

For FY21, the fiscal deficit was estimated at 3.5 percent by the government in the last Budget announced in February 2020.

Finance Minister Nirmala Sitharaman on Monday during her budget speech announced that the government has estimated India’s fiscal deficit for the current financial year at 9.5 percent and has set a target at 6.8 percent for the financial year 2022.

A fiscal deficit is a shortfall in a government's income compared with its expenditure.

For FY21, the fiscal deficit was estimated at 3.5 percent by the government in the last Budget announced in February 2020.

India’s fiscal deficit in the nine months to December was seen at 11.58 trillion rupees ($158.74 billion), 145.5 percent of the budgeted target, according to the government data released on Friday.

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Theoretically, an increase in the fiscal deficit gets an economy out of a slowdown as spending rises, giving more money in the hands of people to buy and invest. However, long-term deficits can be harmful to a country’s growth and stability.

The fiscal deficit estimate of the current financial year is much higher, even though the larger expectation was that the number would overshoot the target set last year as the government would look to spend more to push economic recovery after massive damage by COVID-19.

With the fiscal deficit number at 9.5 percent for the current year, the target set to bring down the country’s fiscal deficit to 3 percent has been delayed yet again.

The Fiscal Responsibility and Budget Management Act, enacted in 2003, had set the target for India’s fiscal deficit at 3 percent of the gross domestic product (GDP) for March 2021, however, this goal has been deferred.

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 The government now aims to reach below 4.5 percent by FY26 in a steady manner. The FRBM Act allows the government an ‘escape clause’ of 0.5 percentage points which can be invoked during calamities and crises when the economy witnesses any structural changes or a slowdown. In last year’s Budget, the government had invoked this clause.

For the last 15 years, India has largely successfully kept the deficits below budgeted levels. In 2018-19, the government exceeded its budgeted target of fiscal deficit of 3.3 percent, with the actual deficit being 3.4 percent.

In 2019-20, the government had set a budget estimate of 3.3 percent for the fiscal deficit but exceeded the target in revised numbers.