Know your budget: What is fiscal deficit?

What is fiscal deficit?

It is the difference between the government's total expenditure and its total revenues excluding money generated from borrowings.

What happens if fiscal deficit shoots up?

The government has to borrow more or ask RBI to print more money. But printing of currency has its side effects. It leads to inflation and raises interest rates. Therefore, no government wishes to finance fiscal deficit by printing money. It prefers borrowing.

Where does the Govt borrow from?

Market, small savings fund, state provident funds, external sector and short term funds. Market borrowing, however, is the major source to finance fiscal deficit.

Borrowing too has an adverse impact?

Yes. If the government borrows more, it leaves a little room for private sector and corporates to access the market. Also, large govt borrowing shoots up interest rates for all other borrowers. Besides, it increases the debt repayment burden of the government and also pushes up rate of investment in the economy which in turn leads to a slow down.

Why is the fiscal deficit number so keenly observed?

It reveals the overall strength in an economy. Global investors watch the number as they fear a high fiscal deficit may crowd them out from the market and high inflation and high interest rate regime can impact their profitability.

How much fiscal deficit a country can afford to have?

Should not be more than 3%-4%. But in a developing economy, where tax revenues are not enough to finance growing expenses of the government, fiscal deficit can go a little higher.

Fiscal deficit in India's context?

India came up with Fiscal Responsibility and Budget Management (FRBM) Act in 2003 with an objective to reduce the fiscal deficit to 3% of GDP by 2008-09 with annual reduction of 0.3% per year. It never happened and the govt kept on relaxing the target year after year. Last year, it amended the FRBM rules and extended the time line of meeting the target of 3% to 2020-21.

Should India be obsessed to meet fiscal deficit target?

With new GST regime bound to have some teething problems, economists allow a small slippage but rating agencies and International Monetary Fund recommend a strict adherence to target.

How the numbers moved over the years?

From a high of 5.9% in 2011-12, fiscal deficit has been brought down to 3.5% in 2017-18. The target was to achieve 3.3% in 2018-19. The government may breach that by a percentage point.