What is Fiscal Deficit?

Fiscal deficit refers to the gap between the government’s total revenue and total expenditures. It serves as a gauge for how much money the government will ultimately need to borrow. Borrowings are excluded from the overall revenue calculation.

How is the Fiscal Deficit financed in India?

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

What are Revenue Receipts?

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.

What does Deficit Budget mean?

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

Who funds fiscal deficit?

The fiscal deficit is financed from two sources: Internal loans from a commercial bank or borrowings from outside institutions like the IMF, other governments, etc. Deficit financing , or borrowing money from the RBI in exchange for its bonds

What is the relationship between fiscal deficit and inflation?

A one percentage point increase in the overall deficit under a fiscal dominance system causes the inflation rate to grow by roughly 50 basis points, which is more than five times higher than under a monetary dominance system.

What is the relation between GDP and fiscal deficit?

Both the absolute fiscal deficit and the fiscal deficit as a percentage of GDP are determined (GDP). A nation’s fiscal deficit is measured as a percentage of its GDP or, more simply, as the sum of all of the government’s expenditures above receipts.

How can we reduce fiscal deficit in India?

To reduce the fiscal deficit in India, the following points can be considered: Increased focus on tax-based income and sensible steps to decrease tax avoidance. Government subsidy cuts will also aid in lowering the deficit. Strive to limit unforeseen expenses. Using home resources for borrowing.

What is deficit financing?

Deficit financing refers to the practice of a government spending more than it receives in tax income and making up the shortfall by borrowing or creating new money.

What is deficit financing in India?

In India, the current budget deficit of the union government is claimed to be financed through borrowing from the Reserve Bank of India and drawing down the government’s cash reserve.

What is the main objective of deficit financing?

The budget imbalance brought on by excessive government spending is what is referred to as deficit financing . It refers to finding resources to pay for the deficit brought on by too much spending relative to income. By selling bonds to the public or by creating fresh money, the gap is being filled.

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Fiscal Deficit UPSC – Meaning, Components, and Formula

By Balaji

Updated on: March 31st, 2023

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

In this article, we have covered the Fiscal Deficit in a detailed manner which would be helpful for UPSC Exam.

Table of content

1. Fiscal Deficit
2. Fiscal Deficit – Meaning
3. Fiscal Deficit Formula
4. Components of Fiscal Deficit
5. Framework of Fiscal Deficit
6. Deficit Financing
7. Difference Between Fiscal Deficit and Revenue Deficit
8. Fiscal Deficit 2023
9. Reasons for High Fiscal Deficit
10. Fiscal Deficit UPSC
11. Fiscal Deficit UPSC Questions

Fiscal Deficit

The difference between the total government expenditure and its total receipts, excluding the borrowing, is known as Fiscal Deficit. 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.

One should note that here, the term deficit doesn’t mean debt.

Fiscal Deficit – Meaning

The Consolidated Fund of India’s fiscal deficit is defined by the government as “the excess of total disbursements from the Fund, except repayment of the debt, over total revenues into the Fund, excluding debt receipts, during a financial year.”

The total amount of money spent in excess of income, or fiscal deficit, is measured as a percentage of gross domestic product (GDP). By marking out the difference between the total income and the total expenditure by the government, the Fiscal Deficit is calculated.

Fiscal Deficit UPSC Notes

Fiscal Deficit Formula

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

The Fiscal Deficit has been calculated on 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 center 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-

The Indian constitution stipulates that a Finance Commission should be established every five years to provide guidelines for allocating some federal funds to state governments and to provide medium-term guidance on fiscal issues because a state’s taxing power may not always be proportionate to its spending obligations.
The government presents the Union Budget to the Parliament for legislative discussion, and the Parliament’s adoption of the provisions is a crucial component of fiscal policy. The Union Budget includes an overview of the government’s proposed taxing and spending provisions.
In order to address the issue of fiscal restraint, the Fiscal Responsibility and Budget Management (FRBM) Act of 2003 was passed.

Deficit Financing

Deficit financing is the process by which the government spends more money than it collects in taxes and makes up the shortfall by borrowing money or creating new money. When the government’s overall income (revenue account plus capital account) is less than its total expenditures, deficit financing may result.

The government may choose to borrow money from the public by issuing bonds and other securities, ordering the RBI to create fresh currency notes, or withdrawing funds from its cash balance deposited with the RBI.

Printing extra money or issuing bonds are a couple of examples of deficit financing.

Difference Between Fiscal Deficit and Revenue Deficit

Fiscal Deficit (FD) refers to the surplus of budget expenses over budget receipts that is not due to borrowing, whereas Revenue Deficit refers to the surplus of revenue expenses over revenue receipts.

Fiscal Deficit = Budget Expenditure – Budget Receipts (excluding borrowings)
Revenue Deficit = Revenue expenditure – Revenue receipts.

A revenue deficit shows the government’s inability to cover its regular or recurrent expenses, whereas a fiscal deficit shows the entire amount of borrowings for a fiscal year.

Fiscal Deficit 2023

India’s external debt is estimated in the Union Budget 2023 to be 22.118 trillion rupees or almost 1% of the entire fiscal deficit of 17.86 trillion rupees in 2023–24 (BE).

The government wants to continue on the path of fiscal consolidation and reduce the fiscal deficit to less than 4.5% of GDP by 2025–2026.
The budget deficit is anticipated to be 5.9% of GDP in BE 2023–2024, according to the Finance Minister.
According to the Budget Estimate, the fiscal deficit in RE 2022–23 is estimated to be 6.4% of GDP.

The central government should reduce its Fiscal Deficit to 4% of GDP and its outstanding liabilities to 56.6 percent 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 Fiscal Deficit

A high budget deficit may benefit the economy if the funds are used to build transportation infrastructure, such as roads, ports, and airports, which promotes economic expansion and leads to job creation. There are mainly two reasons for the high Fiscal Deficit, firstly, either less revenue realization like during the pandemic due to the closing of businesses and other commercial activities, or the revenue collection has dipped lowest.

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.