This budget’s fiscal finesse favours the entire economy

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₹300 billion) to 5.8% of gross domestic product (GDP), despite weaker-than-expected nominal GDP growth. Further, by targeting a fiscal deficit of 5.1% of GDP for the next year (lower than the 5.2% recommended by very few, including us), the government clearly signalled that achieving a fiscal deficit of 4.5% in 2025-26 is now a feasible goal. This is a clear and emphatic message from the government that it prioritizes long-term macroeconomic stability, even if it involves sacrificing some short-term growth.

All this was done while ensuring the continuance of its long-held strategy of prioritizing investment (capital spending) over consumption (revenue spending). But why is a lower fiscal deficit so important? This question is typically answered with “to crowd in the private sector," or words to this effect. Strictly speaking, there is currently no crowding out of private investments.

It would be unreasonable to argue that these are suppressed by current interest rates on bank borrowings. Therefore, a lower fiscal deficit is unlikely to immediately boost private investments. However, over the medium- to long-term, a lower fiscal deficit implies that the government will consume a smaller portion of the household surplus (savings), leaving a larger amount of funds and resources for the private sector.

This does not necessarily mean that the private sector will immediately start utilizing those resources. However, it does create an opportunity for the private sector to grow and expand at its own pace, without relying on external financing (widening the country’s current account deficit, that is). Let us look at some data.