Core Sector Declines Amid Improving Fiscal Deficit in India

Why in the news?

Recent data reveals India’s core sector contracted significantly in August, while the fiscal deficit showed improvement, highlighting mixed signals for the economy’s health and performance.

Highlights about the Mixed Economic Signals for India:

Core Sector Performance:

  • In August, India’s core sector output fell by6%, showing a significant decline from the previous month’s 1.3% drop.
  • Six of the eight core sectors reported negative growth, with coal production down 1%, crude oil falling by 3.4%, and electricity output decreasing by 5%.
  • Only fertilisers (3.2% growth) and steel (4.5% growth) showed positive performance.

    Fiscal Deficit Update:

  • The fiscal deficit for the first five months of the financial year reached ₹4.35 trillion, down from ₹6.43 trillion during the same period last year.
  • This figure represents 27% of the total annual target of ₹16.13 trillion, which is an improvement from 3% last year.
  • The government aims for a fiscal deficit target of 9% of GDP for FY25, down from 5.6% in the previous year.

Core Sector Declines Amid Improving Fiscal Deficit in India

Market Implications:

  • The mixed economic data may impact market sentiment, as the contraction in the core sector raises concerns about industrial performance.
  • Experts suggest that the decline may be influenced by high base effects from the previous year, indicating potential for future recovery as infrastructure activities increase post-elections.

What is Fiscal Deficit?

  • Definition: Shortfall between a government’s revenue and expenditure.
  • Causes: Occurs when expenditure exceeds revenue, requiring borrowing or asset sales.
  • Revenue Sources: Primarily from taxes; projected tax receipts for 2024-25 are ₹26.02 lakh crore.
  • Surplus vs. Deficit: A fiscal surplus occurs when revenues exceed expenditures, which is rare.
  • Calculations: Measured in absolute terms and as a percentage of GDP.
  • Types:
    • Gross Fiscal Deficit (GFD): Total expenditure (including loans) minus revenue receipts.
    • Net Fiscal Deficit: GFD minus net lending of the government.
  • Regulation: Governed by the Fiscal Responsibility and Budget Management (FRBM) Act, aiming to limit fiscal deficit to 3% of GDP.
  • Recommendations: Fifteenth Finance Commission suggests 4% of GDP by 2025-26 for the Union Government.

Associated Article:

https://universalinstitutions.com/government-lowers-fiscal-deficit-focuses-on-debt-ratio/