Fiscal Deficit & Current Scenario

The fiscal deficit of India, in simple words, is the “difference between the Government’s total expenditure and its total receipts”. Borrowings are not to be included in calculating the total receipts. India’s fiscal deficit can be financed by borrowing from the Central Bank (which is also called deficit financing or money creation) and market borrowing (from the money market, which is mainly from banks).

The fiscal deficit signals to the government the total borrowing requirements from all sources. We can say that The fiscal deficit is the difference between the government’s revenues and expenditures.

What is the Fiscal Deficit of India?

The phrases ‘fiscal’ and ‘deficit’ combine to form a fiscal deficit. Let’s begin by defining these two concepts.

The term fiscal refers to a calendar year. The data obtained is for a single year and cannot be compared to past years.

The term ‘deficit’ refers to the amount by which a resource falls short of a target, and it is most commonly used to refer to the difference between cash inflows and outflows.

A fiscal deficit results when a government’s total expenditures exceed its receipts, excluding money, borrowed. Taxes, tariffs, penalties, and other sources of revenue for the government, whereas government expenditure includes subsidies, infrastructure expenditures, and so on.

How is the Deficit-Financed?

Issuing bonds: through this, the government issues bonds, which leads to an increase in revenue for the government. The people buy a bond, and the government gets more cash, which helps it reduce the deficit.

Through fiscal policies:

• A rise in taxes would increase spending, which would reduce the deficit. Tax hikes, on the other hand, are unpopular with the public.
• Reduced government expenditure: The government can also reduce its spending to meet its deficit. This can be accomplished by lowering subsidies or infrastructure spending.

The fiscal deficit formula 

A government has many expenditures like salaries & payments of staff, funds for various schemes, loans and grants, contingency expenditures like those of disasters and compensation etc.

Similarly, it has many revenue sources like – interests it receives on loans given, revenues from disinvestment, revenues generated from selling resources like spectrum, oil, minerals etc. These revenues do not create any debt, as the government does not have to pay back anything to anyone. For, e.g. revenues from spectrum auctions belong to the government; it does not have to pay it back to anyone. These revenues are called NON-DEBT Creating revenues.

There are some other types of revenues that are debt creating. E.g., the loans that the government takes from the World Bank or other countries. The government has to pay it back in a stipulated period with interest.

The fiscal deficit formula-

Fiscal Deficit(FD) = Total Expenditure – ( all non-debt creating revenues )

So, we do not include revenues like loans under revenues while calculating FD.

Why does the fiscal deficit of India occur?

A fiscal deficit occurs when the government’s total expenditures exceed its revenue, excluding money from borrowings. Deficit differs from debt, which is an accumulation of yearly deficits.

Government total expenditures refer to government spending on investment goods, which simply means spending money on things that last for a lifetime. This may include investment in hospitals, schools, roads, equipment and machinery.

Government current expenditure refers to government day to day spending. This simply means spending on recurring items. This includes periodic salaries and wages, spending on consumables and everyday things that the government uses as the provided goods or services.

Main items of Government expenditures

• Defense
• Internal security
• The merit of goods under the social sector like education, health and housing.
• The economic policy covers subsidies to agriculture and industry.

What is the difference between the revenue deficit and fiscal deficit of India? 

The difference between the revenue deficit and fiscal deficit is not very complex, but it does leave an ordinary person in doubt. A revenue deficit is when the government earns less than expected in that fiscal year, so that is a shortfall of money for the government to spend in that fiscal year. So, when you say the revenue deficit of the government is decreasing means the government is earning money closer to the expected revenue of that fiscal year.

 A fiscal deficit is when the government spends more money in that fiscal year than what it possesses, its expenditure is more than its revenue. The government’s fiscal deficit decreases means government spending is closer to its revenue in that fiscal year.

In short, the difference between India’s revenue deficit and fiscal deficit is revenue expenditure minus revenue income/receipts, and fiscal deficit is total expenditure minus revenue income/receipts.

Conclusion

India’s fiscal deficit measures the net amount of government payments (total spending minus taxes paid) to the private sector. It thus creates net income inflows to the private sector. As accountants know, the deficit of one sector (government) is identical to the surplus of the other sectors. A too-small deficit (or, worse, a fiscal surplus) cuts the inflows to the private, productive sector to the point of causing a recession (lack of demand). A too-large deficit will increase inflows to the point of causing inflation (excess demand).