Fiscal Slippage, Causes and Implications

Table of Contents

Context: In a recent interaction with the Indian Diaspora, the Union Finance Minister has stated that the government’s debt is being managed well and the fiscal deficit will not slip out of control.

What is Fiscal Slippage?

Fiscal slippage refers to a deviation from the government’s targeted fiscal deficit, when the actual fiscal deficit exceeds the budgeted or projected level.

Fiscal Deficit = Total Expenditure – (Revenue Receipts + Non-debt Capital Receipts)

It shows how much the government needs to borrow to meet its expenses.

What Causes Fiscal Slippage?

Revenue Shortfall ⏩ Lower-than-expected tax revenues
Higher Expenditure ⏩ Rise in subsidy bills, Increase in interest payments etc.
External Shocks ⏩ Global recession, war, or pandemic (covid-19) etc.

Implications of Fiscal Slippage

Increased Government Borrowing:
- It can lead to higher interest rates in the economy (crowding out private investment). ⏩ High debt-to-GDP ratio.
Pressure on Credit Rating:
- Global agencies like Moody’s or S&P may downgrade India’s sovereign rating.
Inflation Risk:
- If the deficit is financed via monetary expansion (printing money)⏩ it can cause inflation.
Loss of Investor Confidence:
- It may discourage foreign investment and raise concerns about macroeconomic stability.