FISCAL DEFICIT AND HUMAN DEVELOPMENT IN INDIA: AN EMPIRICAL ANALYSIS OF THE RELATIONSHIP BETWEEN FISCAL DEFICIT, HUMAN DEVELOPMENT INDICATORS AND SOCIAL-SECTOR EXPENDITURE

Abstract

Fiscal deficit is an important indicator of the financial position of government and reflects the extent to which government expenditure exceeds its non-borrowed receipts. In a developing economy such as India, fiscal deficit has a dual significance. On the one hand, excessive fiscal deficits can increase public debt, interest obligations and macroeconomic pressures, potentially reducing the fiscal space available for social-sector development. On the other hand, fiscal expansion can finance education, health, nutrition, social security and infrastructure, thereby contributing to improvements in human development. This study examines relationship between fiscal deficit and human development in India, with particular emphasis on the HDI, literacy, life expectancy and health outcomes. It also examines the relationship between fiscal deficits and expenditure on education and health. The study uses secondary data from the RBI), Ministry of Finance, Government of India, Ministry of Statistics and Programme Implementation (MoSPI), Ministry of Health and Family Welfare and United Nations Development Programme (UNDP). The evidence indicates that India's central government gross fiscal deficit increased sharply during the COVID-19 period, reaching 9.2 percent of GDP in 2020–21, before declining to 5.9 % in 2023–24 and a budgeted 5.1 percent in 2024–25. During the same broad period, India's human-development indicators improved over the longer term, although the relationship is not mechanical or necessarily causal. India's HDI increased to 0.685 in 2023, while life expectancy reached 72.0 yrs. Combined government expenditure on social services also increased substantially, particularly during the pandemic. The findings suggest that the composition and productive use of fiscal expenditure are as important as the size of the fiscal deficit when evaluating its implications for human development.