Fiscal Deficit is the difference between total revenue and total expenditure of the government. The fiscal balance of a country is calculated by its government’s revenue followed by its expenditure in the provided financial year, the situation where the government expenses increase more than the revenue in a year is a fiscal deficit. In this article, we will study about the fiscal deficit which is important for the UPSC examination.

Overview of Fiscal Deficit

• The fiscal deficit comes into play either due to a revenue deficit or a drastic increase in capital expenses.
• Capital expenditure is sustained in creating long-term assets for the long run like buildings, factories, the industrial sector, and other developments.
• The difference between total revenue and total expenditure of the government is said to be the fiscal deficit.
• Indicating the total borrowings needed by the government. While calculating the total revenue, borrowings are not included”.
• The Government of India describes it as, “the excess of total disbursements from the Consolidated Fund of India, excluding repayments of the debt, over total receipts into the Fund (excluding the debt receipts) during a financial year”.

Components For Calculating Fiscal Deficit

The fiscal deficit calculations are based on two components :

Revenue or income component

• The combination of revenue incurred from taxes imposed by the center and the income yielded from the non-tax variables leads to the income components.
• Corporation tax, customs duties, excise duties, GST, and others are included in taxable income.
• On the other hand, the interest receipts, outsourcing of grants in aid, dividends, and gains, receipts from Union Territories etc are included under non-taxable income.

Expenditure component or expense components

Funds for several works, including payments of, pensions, emoluments, salaries, generating assets, development, health, and various other areas are provided by the government according to the budget and these lead to forming the expenditure component.

Financing of Fiscal Deficit

The Fiscal Deficit is financed in a number of ways. Some notable ways are

• Internally borrowings from a commercial bank
• Borrowing from external sources like the International Monetary Fund (IMF) and other governments, etc.,
• By printing new currency
• Borrowing funds from the Central Bank against its securities.

Calculation of fiscal deficit

• The fiscal deficit can be calculated by marking out the difference between the total income and the total expenditure by the government.
• The total income of the government is calculated by including all taxes, non-debt capital receipts, and other ways of revenue except for borrowings. To calculate the fiscal deficit
• Fiscal Deficit = (Revenue Expenditure + Capital Expenditure) – (Revenue Receipts + Capital Receipts)
• In the simplified form the formula reads out as:
  • Fiscal Deficit = Total expenditure — Total receipts excluding borrowings
• Most of the economies around the globe, including India, run under a fiscal deficit, which means the expenditure by the government is more than its income.

Fiscal deficit for the current financial year in India

• The fiscal deficit of the government reached 9.3% of GDP in FY 2020-2021 measuring a deficit of roughly ₹18.21 lakh crore.
• The government expects a deficit of 6.8% of GDP in the current financial year (FY 2021-2022) and aims to bring it back below the 4.5% mark by 2025-26.
• The Union government fiscal deficit is seen to be ₹5.47 lakh crore which is 36.3% of the Budget Estimate (BE) at the end of October 2021 according to the database shown by the Controller General of Accounts (CGA).
• According to the data released by CGA, the total receipt of the government at the end of November 2021 stood at Rs 13.78 trillion, or 69.8 percent of the BE.
• The Fiscal Responsibility and Budget Management Act, 2003 provides that the Center must take measures to limit the fiscal deficit up to 3% of the GDP by 31st March 2021. However, the NK Singh Committee (set up in 2016) recommended that the government should target a fiscal deficit of 3% of the GDP in years up to 31st March 2020, cut it to 2.8% in 2020-21 and to 2.5% by 2023.
• The 15th Finance Commission (chaired by N K Singh) recommended that the central government reduce its fiscal deficit to 4% of GDP and its outstanding liabilities to 56.6 percent of GDP by 2025-2026. The suggested fiscal consolidation path is as follows:

• The trends in the fiscal deficit in the previous years is given in the graph below

Reasons for High Fiscal Deficit

The Fiscal Deficit can happen either due to poor revenues or high expenditures. However, the reasons for this are macroeconomic in nature. The reasons for the high fiscal deficit during COVID-19 is due to:

• Lower Revenue Realisation - Because of interruption in simple business deeds following the pandemic and lockdowns, the fiscal deficit has faced a lower revenue realization.
• Higher Expenditure: With an identified increase in revenue expenses for food and public Maintenance and development of rural areas could be imputed in pandemic relief programs by the government, the increase in Expenditure has one noticed.

Difference between Fiscal Deficit and Revenue Deficit

Conclusion

The government has a responsibility to take care of many aspects. There are situations when the spending is more for the growth and development of a particular part of society leading to the hike in expenditure. The government of India manages its deficit by borrowing capital from various sources and can also raise funds from the public as well by way of an increase in taxes.