Fiscal Deficit

By K Balaji|Updated : September 6th, 2022

Fiscal Deficit can be defined as the difference between total revenue and expenditure of the government. For example, if the total revenue of the government is Rs.100 and the total expenditure is Rs.120, then the Fiscal Deficit of the government is Rs.20. So in simple words, we can understand that the Fiscal Deficit figure is the amount which the government needs to meet its expenditure. Therefore if the Fiscal Deficit is bigger than the government needs to get the borrowings to meet the extra expenses which are out of running the government.

Fiscal Deficit is an important topic for economics which comes under the General Studies Paper 3 of UPSC CSE. This topic is very important for the aspirants who are going to appear in Civil Services this year. In this article, we have covered the Fiscal Deficit in a detailed manner which would be helpful for UPSC Exam.

What is Fiscal Deficit?

The difference between the total government expenditure and its total receipts, excluding the borrowing, is known as Fiscal Deficit. One should note that here, the term deficit doesn't mean debt.

Due to the events like a major rise in capital expenditure and deficit arising from the revenue, a Fiscal Deficit occurs. It plays a significant role in knowing how the government is managing its finances.

Formula for Calculating Fiscal Deficit

By marking out the difference between the total income and the total expenditure by the government, the Fiscal Deficit is calculated.

To calculate the Fiscal Deficit, all taxes, non-debt capital receipts, and other ways of revenue except borrowing are included in calculating the total income of the government.

Fiscal Deficit = (Revenue Expenditure + Capital Expenditure) – (Revenue Receipts + Capital Receipts).

The formula reads out in the simplified form as-.

Fiscal Deficit = Total expenditure — Total receipts excluding borrowings.

In most economies, the expenditure by the government is more than its income around the world, including in India means they run under a Fiscal Deficit.

Components of Fiscal Deficit

Fiscal Deficit has been calculatedOn the basis of two-components:

Revenue Component

  • Both lead to the income component, either the revenue collected from the taxes which are imposed by the centre or the income collected from the non-tax variables.
  • Tax income included the corporation tax, customs duties, excise duties, GST, and others.
  • While on the other hand, taxable income includes interest receipts, outsourcing of grants in aid, dividends, and gains, receipts from the Union Territories, etc.

Expenditure Component

  • The expenditure components formed by the government provided funds for several works, including payments of pensions, emoluments, salaries, generating assets, development, health, and various other areas according to the budget.

Framework of Fiscal Deficit

About India's fiscal policy agenda, there are some interesting facts, such as-

  • Directives for the formation of a Finance Commission every five years have been provided by the Indian constitution to provide the basis for the assignment of some revenues of the centre to the state government and on fiscal matters providing the medium-term direction as the state taxing capacity is not necessarily proportionate accordingly with their spending responsibilities.
  • An account of its proposed taxing and spending provisions is put by the government before the Parliament for the legislative debate in the Union Budget, and the approval of the provisions is also an important part of the fiscal policy.
  • To be concerned with Fiscal discipline, an Act was passed- the Fiscal Responsibility and Budget Management (FRBM) Act, 2003.

Difference Between Fiscal Deficit and Revenue Deficit

The excess of Budget Expenditure over the Budget Receipt other than borrowing is known as Fiscal Deficit(FD) while the excess of Revenue Expenditure over the Revenue Receipts is known as Revenue Deficit.

  • Fiscal Deficit = Budget Expenditure – Budget Receipts (excluding borrowings), while the Revenue Deficit = Revenue expenditure –Revenue receipts.
  • A Fiscal Deficit indicates the total government borrowings during a fiscal year, while a Revenue Deficit indicates the inefficiency of the government in reaching its regular or recurring expenditure.

Fiscal Deficit of Current Year

With a deficit of roughly 18.21 lakh crore rupees, the Fiscal Deficit of the government reached 9.3 per cent of GDP in Financial Year 2020-2021.

  • In the current Financial Year (FY 2021-2022), the government expects a deficit of 6.8% of GDP and aims to bring it below 4.5% by 2025-26.
  • According to the database shown by the Controller General of Accounts (CGA), at the end of October 2021, the Fiscal Deficit of the Union Government is seen to be 5.47 lakh crore Rs which is 36.3% of the Budget Estimate(BE).
  • The Center must take measures to limit the Fiscal Deficit up to 3% of the GDP by 31st March 2021, according to the Fiscal Responsibility and Budget Management Act, 2003. However, the government should target a Fiscal Deficit of 3% of the GDP in the years up to 31st March 2020, cut it to 2.8% in 2020-21 and 2.5% by 2023 by the 15th Finance Commission recommendation under the chairmanship of NK Singh.
  • The central government should reduce its Fiscal Deficit to 4% of GDP and its outstanding liabilities to 56.6 per cent of GDP by 2025-2026, on the recommendation of the 15th Finance Commission under the chairmanship of NK Singh ( set up in 2016).

Reasons for High Deficit

There are mainly two reasons for the Fiscal Deficit:

  • Either less revenue realization like during pandemic due to the closing of business and other commercial activities, the revenue collection has dipped lowest; and the second reason is increasing expenditure by the government, due to the government's obligation towards many schemes like- health, education, etc.
  • The expenditure is high, and the obligation increases further during the pandemic when the government has taken various steps like providing free food, vaccination, and direct benefit transfer(DBT), among others, which further increases the burden on the finances resulting in further increasing Fiscal Deficit.

Fiscal Responsibility and Budgetary Management Act (2003)

The Fiscal Responsibility and Budgetary Management Act was enacted in Parliament in 2003 to bring fiscal discipline and improve microeconomics management and overall management of public funds by moving towards a balanced budget.

  • This Act was based on the Gramm Rudman Act 1985 of the USA, which was based on the concept of a balanced budget.
  • Following the enactment of the FRBM Act, the government constituted a task force headed by Dr Vijay Kulkar to draw up the medium-term framework for fiscal policy to achieve the targets of the FRBM Act.
  • The task force submitted its report in July 2004, and then the Act was implemented in the country.

Main objective/purpose of FRBM Act

  • To eliminate revenue deficit and build revenue surplus by 2008-09.
  • To bring down the Fiscal Deficit to a manageable 3% of GDP by March 2008.
  • Note- The above-mentioned target was not achieved, so this FRBM Act was discontinued in 2009.

FRBM Act Review Committee

  • The targets of the FRBM Act 2003 were put up several times. In 2012 and 2015, notable amendments were made, but a target was not achieved.
  • As per the Union Budget 2016-17 government constituted a committee to review the FRBM Act under the chairmanship of N.K. Singh.
  • So the committee recommended that the government should target a Fiscal Deficit of 3% of the GDP in the years up to 31 March 2020 and cut it to 2.8% by March 2021 and cut it to 2.5% by March 2023.

Fiscal Deficit UPSC

Fiscal Deficit is an important topic of the Economy which is recently been seen frequently in the news, so it has become important for both UPSC Prelims as well UPSC Mains exam point of view. So this topic can't be avoided.

Here we provide comprehensive notes on the Fiscal Deficit. To prepare this or other relevant topics related to the economy or Current Affairs, you can also refer to the NCERT Books for UPSC or Economics Books for UPSC.

>> Download Fiscal Deficit UPSC Notes PDF

Fiscal Deficit UPSC Sample Question

Question 1- Consider the following statements:

  1. Market borrowing
  2. Treasury bills
  3. Special securities issued to RBI

Which of these is/are components of internal debt?

  1. 1 only
  2. 1 and 2
  3. 2 only
  4. 1, 2 and 3

Answer- Option D

Question 2- Which of the following is not a part of India’s National Debt?

  1. National Savings Certificates
  2. Dated Government Securities
  3. Provident Funds
  4. Life Insurance Policies

Answer- Option A

Other Important UPSC Notes
Good GovernanceSocial Empowerment
Public Distribution SystemAyushman Bharat Scheme
Wetlands in IndiaSpecial Economic Zone In India
National Commission for WomenZero Coupon Bond
Black CarbonPermanent Settlement
Aspirational District ProgrammeCitizenship Amendment Act (CAA 2019)

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FAQs on Fiscal Deficit

  • It is a new concept that was introduced in the budget 2009-10. When we deduct assistance given to States for creating capital assets from the Revenue deficit, we get an Effective Revenue Deficit.

  • It is a basic measure of fiscal responsibility of the government in a particular financial year. It indicates how much government borrowing is going to meet the expenses other than interest payments.

  • Earlier referred to as deficit financing, Government can finance the Fiscal Deficit by borrowing from RBI instead of government securities.

  • A budget deficit is a case when current expenses exceed the amount of income received through standard operations.

  • Those types of Government receipts which do not create liability for the government and do not cause any reduction in assets. For example- tax receipts, fees, fines, interest receipts, profit of PSU, etc.

  • Those types of Government expenditure that neither create assets for the government nor reduces the liability of the government. For example- salary, pension, interest payment, defence expenditure, etc.

  • A government budget is said to be a Deficit Budget when the government estimated revenue is less than the anticipated expenditure.

  • If a country has both deficits that, are Current Account Deficit and Fiscal Deficit, then we can say that the country is suffering a Twin Deficit.

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