What Is Fiscal Deficit And Why It May Not Always Be A Bad Thing

Around the time of the Budget presentation in Parliament, fiscal deficit becomes a buzzword. While examining the merit of the budget, economists often test it on several parameters including fiscal deficit.

So, what exactly is fiscal deficit?

Simply put, fiscal deficit is the difference between the government’s earnings and expenditure. So, when the government’s spending surpasses its earnings in any financial year, it’s a fiscal deficit situation.

The deficit is computed in both absolute terms and as a percentage of the country’s Gross Domestic Product (GDP). By the definition, fiscal deficit may sound like an absolute negative indicator. However, moderate levels of fiscal deficit are considered a positive sign for the economy. They are seen as indicators that the government is spending on schemes and infrastructure projects that may boost growth in future.

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How is fiscal deficit calculated?

Fiscal deficit is calculated by taking out the difference between the government’s total income or receipts and its expenditures.

The components that make up the government’s total income are — corporation tax, income tax, custom duties, Union excise duties, GST and taxes of Union territories, interest receipts, dividends and profits, external grants, other non-tax revenues, and receipts of Union territories.

Meanwhile, the government expenditure comprises revenue expenditure, capital expenditure, interest payments, and grants-in-aid for the creation of capital assets.

The Union Budget also factors in various other types of deficit including revenue deficit where the revenue expenditure is more than revenue receipt; and Primary deficit which is calculated as fiscal deficit minus the interest payments.

In case there’s a fiscal deficit, the government covers it by borrowing from the market through instruments like Treasury Bills and Bonds.

Last year, India recorded a fiscal deficit of 9.3 percent of the GDP or Rs 18.21 lakh crore. The COVID-19 pandemic and the lockdowns that followed were seen as key reasons for the inflated fiscal deficit rate. For the current financial year, the Indian government expects to bring the fiscal deficit down to Rs 15.09 lakh or 6.8 percent of the GDP.

First Published: IST

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