You may often come across the term Fiscal Deficit while going through the budget and various economic policies. Many of you might know what Fiscal Deficit is. But, a majority of people tend to overlook this word while reading economic happenings in the country.
Topics pertaining to the economy and monetary policies are often featured in various bank and SSC entrance examinations. Here, we bring to you this blog post to develop a good understanding about Fiscal Deficit and its impact on our economy.
Overview of Fiscal Deficit
Let’s understand the concept of Fiscal Deficit in layman terms: Consider the government as a normal person with income and expenditure, but unlike normal people, the Indian Government often ends up spending more than what they earn. In this case, the government overcomes the shortfall in income with borrowings.
Fiscal Deficit is the amount that the government needs to borrow (in a given year) because their expenditure was more than their income. Liabilities of the government are also a part of the deficit.
Fiscal Deficit = (Total expenditure of the government) – (Total revenue of the government excluding borrowings)
Therefore, fiscal deficit highlights the borrowing requirement of the government during a financial year.
Types of Fiscal Deficit: Gross Fiscal Deficit & Net Fiscal Deficit
Gross Fiscal Deficit (GFD) is a measure of the total expenditure incurred by borrowing and drawing down the reserved cash.
Net Fiscal Deficit (NFD) = (Gross Fiscal Deficit) – (Net lending of the Central Government)
Causes of Fiscal Deficit
- Government’s spending: Fiscal deficit occurs due to a major hike in capital expenditure. Capital expenditure is aimed to create long-term assets such as factories, buildings and other infrastructure developments.
- Inflation: Ours is an agrarian economy and depends on monsoon. If the monsoon is weak, prices of edible products will increase and savings will decrease as people/government will spend more on goods and services. This will lead to inflationary pressure in the economy.
- Lower revenue: Lowering custom duty and excise duty will lead to declining revenues and hence causes fiscal deficit.
- Tax concessions: If the government provides tax concessions to a particular group of people, then it would earn less, leading to an increase in fiscal deficit.
- Slow economic growth: In case of sluggish economic growth, revenue generation will be at a slower pace, eventually leading to fiscal deficit.
Funding of Fiscal Deficit
The biggest challenge before the government is to generate funds to meet excess expenditure. Now the question arises, where it will be funded from? The answer is that funds requirement can be met by borrowings from the public. This borrowing is called Fiscal Deficit, which is usually expressed as a percentage of GDP.
- Borrowing from domestic sources: Public banks and commercial banks are a great savior in times of Fiscal Deficit. This includes using money deposited in Provident Fund (PF) and small saving schemes.
- Utilizing foreign exchange reserves: Withdrawing down certain amount from foreign exchange reserves or borrowing from the World Bank, IMF etc. can help in reducing Fiscal Deficits.
- Deficit Financing: New currency notes are printed against government securities to raise funds. Deficit Financing is kept within safe limits to avoid inflationary trends.
Fiscal Deficit Situation in India
Since fiscal deficit is calculated as a percentage of GDP. GDP is the measure of monetary value of all goods and services across the country over a specified period of time.
Let’s go through Fiscal Deficit statistics.
|Financial Year||Fiscal Deficit|
|2015-16||3.9% of GDP|
|2014-15||4.1% of GDP|
|2013-14||4.7% of GDP|
|2012-13||4.9 of GDP|
As per the government data, in the current year, revenues are lower and expenses are more, leading to a bad situation where the government will have to borrow more than what they wanted without spending it on building dams or roads. This is the cause for concern about the Fiscal Deficit.
Let’s go through expected questions based on Fiscal Deficit.
- Fiscal Deficit for the year 2015. (Ans: 1% of the GDP)
- According to the Union Budget, how much per cent of Revenue Deficit to be seen in 2015-16? (Ans: 8%)
- Amount to be spent on capital expenditure specifically on railways and roads in 2016. (Ans: 2,18,000 crore)
- Targeted Fiscal Deficit for 2016. (Ans: 6% of GDP)
Hope the above read was useful in understanding Fiscal Deficit and now you are better prepared to answer questions on the same.
Stay tuned for more updates on the economy and other government policies.