Definition
Fiscal deficit occurs when a government’s total expenditure exceeds its total revenues in a particular financial year, excluding the money it acquires by borrowing. Also known as Gross Fiscal Deficit, it occurs in situations when a government spends more money than it earns from revenues. The potential cause of fiscal deficit is either a revenue deficit, where the government’s income is insufficient to cover its operating expenses, or an increase in capital expenditure that includes spending on long term investments such as infrastructure, public buildings, and other developmental projects.
In India’s Interim Budget for 2024-25, Nirmala Sitharaman, Minister of Finance has set a target to reduce India’s fiscal deficit to 5.1% of Gross Domestic Product for the financial year 2024-25, adding to the previously announced goal of reducing fiscal deficit below 4.5% by 2025-26.
How is Fiscal Deficit Calculated?
Fiscal deficit is calculated as the difference between the total expenditure and the total revenue of the government and as a percentage of a country’s Gross Domestic Product (GDP).
The formula for the calculation of fiscal deficit is:
Fiscal Deficit= Total Expenditure (Revenue expenditure + Capital expenditure) – Total Receipts (Revenue receipts + Capital receipts excluding borrowings)
Two components that influence this calculation:
Income:
- Tax Revenue: such as GST, taxes from Union Territories, customs duties, corporation tax and other taxes collected by the central government.
- Non-Tax Revenue: includes dividends and profits, interest receipts etc.
Expenditure:
- Capital Expenditure: comprises spending on creating and improving developmental assets such as infrastructure and public welfare projects.
- Revenue expenditure: includes payments from salaries, pensions, grants, healthcare and interest on debts.
Measures to Balance Fiscal Deficit
In India, the government balances fiscal deficit by borrowing from different sources to cover the shortfall. These include issuing bonds and attracting lenders who purchase these bonds to raise funds, lending from public sector banks, central banks, international markets, etc. Reserve Bank of India also supports government borrowing by purchasing bonds from private lenders through Open Market Operations.
Fiscal deficit also opens up an opportunity for the government to expand welfare activities and policies for the country, without having to increase taxes, contributing to the overall development of the country if the deficit is balanced efficiently.
