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Last Updated : Jan 04, 2020 10:00 AM IST | Source: Moneycontrol.com

Explained | What is fiscal deficit and what is the ideal target for India?

Fiscal deficit is the difference between total revenue (or income) of the government in comparison to the total expenditure.


The difference between total revenue and total expenditure of the government is termed as fiscal deficit. Generally, fiscal deficit takes place either due to revenue deficit or a major hike in capital expenditure.

Here's an explainer on what fiscal deficit means and everything else surrounding it.

What constitutes the government's total income?

Well, it has two components - revenue receipts and non-tax revenues. Revenue receipts of the government include Corporation Tax, Income Tax, Custom Duties, Union Excise Duties, GST and taxes of Union territories.

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Non-tax revenues include Interest Receipts, Dividends and Profits, External Grants, Other non-tax revenues and Receipts of union territories

What constitutes the government's expenditure?

Well, govt.'s expenditure includes -- Revenue Expenditure, Capital Expenditure Interest Payments and Grants-in-aid for creation of capital assets. The fiscal deficit is usually mentioned as a percentage of GDP.

The government has estimated the fiscal deficit for the current financial year at Rs 7.03 lakh crore, aiming to restrict the deficit at 3.3 per cent of the (GDP).

Looking at the current figures, the government is likely to run a fiscal deficit higher than 3.3 percent of the gross domestic product announced in Union Budget 2019-20

This is primarily due to the recent corporate tax cuts by the government which will have an impact of Rs 1.45 lakh crore on its revenue mobilisation.

Is high fiscal deficit bad?

Well, not always. A high fiscal deficit can also be good for the economy if the money spent goes into the creation of productive assets like highways, roads, ports and airports that boost economic growth and result in job creation.

Recent corporate tax cuts too were given to boost the investment cycle in the face of slowing GDP growth, which is at a six-year low.

Due to the slowdown, the GST collection has also been subdued putting pressure on overall revenue mobilisation effort of the government.

So, how does a government meet its fiscal deficit?

Governments typically finance their deficit by borrowings. There are many avenues from where a government can borrow — that is from banks, public institutions, public and from overseas investors.

Will the govt. be able to meet its deficit target this fiscal?

Well, experts like, Aditi Nayar, principal economist at ICRA, said concerns on the extent of fiscal slippage persist given the likely shortfall in tax collections and lack of clarity on revenue from telecom license holders and disinvestment.

While, Gita Gopinath, chief economist at the International Monetary Fund, recently said India needs to keep to its fiscal deficit target. “For India, macro stability is very important, which means stability on the fiscal front. That would require increasing revenue mobilisation and also rationalising expenditure.”

Faced with a shortfall in revenue collection, the government has already initiated austerity measures by revising downwards the expenditure limit for the January-March period of the ongoing financial year.

The government has asked all departments to restrict the expenses to 25 percent of the Budget Estimate in January-March.

Some experts have highlighted that the divestment of Bharat Petroleum is crucial for the fiscal balance this fiscal year

What should the ideal fiscal deficit look like?

In India, the FRBM Act suggests bringing the fiscal deficit down to about 3 percent of the GDP is the ideal target. Unfortunately, successive governments have not been able to achieve this target.
First Published on Jan 4, 2020 10:00 am
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