What is a Fiscal Deficit?
A fiscal deficit occurs when a government’s total expenditures exceed its income, excluding borrowings. This shortfall is typically bridged by borrowing money. Fiscal deficits are an essential indicator of a country’s financial health, representing the amount by which government spending surpasses revenue in a given fiscal year.
In simple terms, fiscal deficit reflects how much a government needs to borrow to meet its expenses when its income from taxes and other sources falls short.
Formula for Fiscal Deficit
The fiscal deficit can be calculated using the following formula:
Fiscal Deficit=Total Expenditure−Total Receipts (excluding borrowings)
Where:
- Total Expenditure = Revenue Expenditure + Capital Expenditure
- Total Receipts = Revenue Receipts + Capital Receipts (excluding borrowings)
Understanding Fiscal Deficit
Theoretically, a government may maintain a deficit to finance the large developmental projects or social welfare programs. Though running a fiscal deficit may look disadvantageous, in a growing economy, it can play an important role in stimulating economic activity by funding the necessary infrastructure, education, healthcare, and welfare initiatives.
On the other hand, a sustained fiscal deficit would tend to push public debt up and be accompanied by inflationary pressures and a reduced ability of the government to finance future expenditures. Thus, the levels of budgetary deficits must be watched closely and managed.
Sources of Financing Fiscal Deficit
The government finances its fiscal deficit by borrowing through various channels, including:
- Domestic Borrowing
- The Reserve Bank of India (RBI) issued government securities.
- From commercial banks and public sector units through bonds and treasury bills.
- From the general public through schemes like savings bonds.
- External Borrowing
- By issuing sovereign bonds in international markets.
- By borrowing from multilateral institutions such as the World Bank or the International Monetary Fund (IMF).
- Capital Markets
- Through long-term debt instruments.
Advantages of a Fiscal Deficit
While the fiscal deficit is often viewed negatively, it has several potential advantages when managed effectively:
- Stimulates Economic Growth: From funding infrastructure and development projects, fiscal deficit spending can boost economic growth.
- Encourages Private Sector Participation: Government spending on infrastructure can crowd private investment, especially in sectors like real estate, energy, and transport.
- Supports Welfare and Social Programs: Fiscal deficits enable governments to fund critical welfare programs to reduce poverty and inequality.
- Boosts Aggregate Demand: Increased government spending raises aggregate demand, particularly during economic downturns, helping to revive economic activity.
Key Takeaways
- Fiscal Deficit 2023-24:
Up to the date of the latest available data, the fiscal deficit for the first half of FY 2023-24 has been approximately 39.3% of the budget estimate. The government saw tax collections higher with prudent expenditure management. - Government's Focus on Capital Expenditure:
The government has maintained a priority list of capital spending in the construction of infrastructure and railways as well as in green energy. - External Borrowings:
The Government has explored, through various times, issuance of sovereign green bonds to raise resources for climate-friendly schemes. It could thus break monopsonies in foreign funds and shift demand from the local market.
