We usually prepare a budget at the start of the year to list our expected expenses and income for the year. Our goal is to balance expenses and income or increase income so we can have savings. However, sometimes our spending may exceed income. When the same thing happens to the government, it may end up with a fiscal deficit.
In this article, we will define fiscal deficit and explain how to calculate it. We will also discuss the implications of fiscal deficit on the Indian economy and the union budget’s view on fiscal deficit in India.
What Is Fiscal Deficit?
Fiscal deficit is a negative balance that results from the difference between the government’s spending (excluding debt repayment) and income (excluding debt receipts). In other words, fiscal deficit is the amount by which the government’s spending exceeds its revenue. It is often presented as a percentage of the gross domestic product (GDP), which is the value of final goods and services produced in a country within a specific timeframe.
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Understanding Fiscal Deficit
Another type of deficit similar to fiscal deficit is revenue deficit, which is the amount by which the government’s revenue expenses exceed its revenue receipts. The implications of revenue deficit include increased future loan and interest payment liability for the government. However, the implications of fiscal deficit may be wider than those of revenue deficit.
There can be various reasons for fiscal deficit. For example, the government may cut taxes to boost economic activity during an economic downturn, leading to a decrease in government income and a widening of the fiscal deficit. The government may also need to spend more on infrastructure development projects or provide subsidies and relief to backward classes in order to promote economic development. Such increases in spending can lead to fiscal deficit in India.
To reduce the government deficit, the government may increase taxes or cut expenditures. The government may also try to meet the fiscal deficit by borrowing or creating more money.
Formula for Calculating Fiscal Deficit
To calculate fiscal deficit, we need to consider two variables: total expenditure and total income.
Total government expenditure includes:
- Capital expenditure, which is money spent on health facilities, education, and development of machinery, etc.
- Revenue expenditure, which includes interest on loans, pensions and salaries, and subsidies, etc.
Total government revenue includes:
- Tax revenues, such as GST, custom duties, corporation tax, and taxes from union territories, etc.
- Non-tax revenues, such as interest receipts, dividends, and profits, etc.
We can calculate fiscal deficit by subtracting total government revenue from expenditure in a particular period using the following formula:
Fiscal deficit = Government’s total expenditure – Government’s total income
If the result is negative, it is a fiscal deficit. If the result is positive, it is a fiscal surplus.
Implications of Fiscal Deficit on the Economy
The government budget has a significant impact on the economy, and the fiscal gap between the government’s income and expenditure is an essential part of it.
Here are some ways in which fiscal deficit can impact the economy:
- Fiscal deficit can significantly impact economic growth, the country’s ratings, and inflation, etc.
- A moderate level of fiscal deficit may not be a major problem, especially if the money is used for future economic growth. For example, more spending on infrastructure development projects may lead to increased future revenue.
- If fiscal deficit persists or increases for years, the central government may need to keep borrowing to fill the fiscal gap, resulting in increased interest payments and a downgrade in ratings
What Is Union Budget View On Fiscal Deficit
- The fiscal deficit in India for 2021-22 stood at 6.71% of GDP, while the revised budget estimate for the same was 6.9%
- The fiscal deficit in India for 2022-23 is estimated at 6.4% of GDP. In terms of amount, the fiscal deficit is estimated to stand at ₹16,61,196 cr.
- The total expenditure for the year 2022-23 is expected to be at ₹39.45 lakh cr., out of which the capital expenditure is estimated to be ₹7.5 lakh, 2.9% of GDP. The total receipts for the year, excluding borrowings, are estimated to be ₹22.84 lakh cr.
- The total market borrowings for 2022-23 are estimated to be ₹11,58,719 cr.
Final Thoughts
India is a developing country and it needs to spend capital to boost its various sectors and improve the quality of life of its citizens. This often leads to more expenditure by the government and causes a fiscal deficit in the public account. As long as the deficit is within a limit and can be managed with collection of taxes in future there is no need to worry about fiscal deficit.
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FAQs
A moderate level of fiscal deficit might not be bad for the economy if the government used the money to boost future economic growth.
The government finances a fiscal deficit in India by borrowing from the Reserve Bank of India (RBI) or acquiring money by issuing treasury bills or bonds to the public.
The increased fiscal deficit requires the government to borrow more, increase taxes, cut dearness allowance and dearness reliefs, etc. It may also weaken the Indian rupee against other currencies.
If the government attempts to cover the fiscal deficit by increasing the supply in the economy, resulting in increased demand, it can lead to inflation.
More than the percentage of fiscal deficit, the reason for the same may show whether it is good or not. A moderate level of fiscal deficit may not be a problem if the money is spent on future growth.
