• Fiscal deficit is an economic indicator comparing a government’s total revenue and expenditure.
• Calculated by subtracting total revenue and non-debt creating capital receipts from total expenditure.
• Indicates government borrowing needs to cover expenses.
• Expresses as a percentage of GDP.
• In India, FY24 fiscal deficit is 5.63% of GDP.
• Narasimham committee recommended fiscal deficit introduction in 1997-98.
• Primary deficit is used to reduce fiscal deficit impact.
Fiscal Deficit and National Debt Overview
• Fiscal deficit refers to a shortfall in a government’s revenue compared to expenditure.
• Taxes are the primary revenue source, with expected tax receipts of Rs 26.02 lakh crore in 2024-25.
• Fiscal surplus occurs when revenues exceed expenditure, but is rare.
• Governments focus on controlling the fiscal deficit rather than generating a surplus or balancing the budget.
• Estimates suggest the fiscal deficit will be reduced to below 4.5% of GDP by 2025-26 and 5.8% of GDP for 2023-24.
• National debt is the total amount a government owes its lenders at a specific time.
• Higher fiscal deficits can lead to less repayment of lenders.
• Leading deficit holders include Italy, Hungary, South Africa, Spain, and France.
• The debt-GDP ratio has fluctuated since 2003-04, peaking at 88.5% in 2020-21.
Key Formulas
- Fiscal Deficit= Total Expenditure- Total Receipts (excluding borrowings).
- Revenue Deficit: This deficit of a government or business can be determined by subtracting the total revenue receipts from the total income expenditure.
- Revenue deficit= Total revenue receipts – Total revenue expenditure.
- Debt to GDP Ratio: It It measures how much a nation owes in relation to its GDP
- Debt to GDP= Total Debt of Country/Total GDP of Country
Government Funding Fiscal Deficit in India
Borrowing from Bond Market:
• The government borrows money from the bond market to fund its fiscal deficit.
• The Centre is expected to borrow Rs 14.13 lakh crore in 2024-25, lower than its 2023-24 borrowing goal.
• The Reserve Bank of India (RBI) indirectly facilitates government borrowing through Open Market Operations (OMO).
• Central bank interventions through OMO can create fresh money, potentially increasing money supply and inflationary pressures.
Monetary Policy:
• Central bank lending rates have risen sharply post-pandemic, making borrowing more expensive for governments.
• The FRBM Framework, instituted in 2003, aims to limit the general government debt to 60% of GDP by 2024-25.
• The FRBM Review Committee Report recommends a debt to GDP ratio of 60% for the general government by 2023.
Importance of Fiscal Deficit:
• It directly impacts inflation as the government uses fresh money issued by the central bank to fund its fiscal deficit.
• A lower fiscal deficit indicates better fiscal discipline, leading to higher ratings for Indian government bonds.
• A high fiscal deficit can adversely affect the government’s ability to manage its overall public debt.
A fiscal deficit can lead to inflation, high interest rates, crowding out private investment, a debt trap, and a country’s ratings. It is the difference between a government’s total revenue and expenditure in a financial year, and can be calculated as an absolute amount or a percentage of a country’s GDP.
