Fiscal Deficit

What is the Fiscal Deficit?

The fiscal deficit is the difference between the government's total expenditure and its total receipts (excluding borrowing).  Or we can say that if Total Expenditure >Total receipt i.e.

Fiscal Deficit = Total Expenditure- Total Receipt

It indicates government’s borrowing requirements from all sources to finance its expenditure. Fiscal deficit is expressed as a percent of GDP which indicates capacity of a country to borrow in relation to what it produces. High % to GDP means government is borrowing beyond its capacity in relation to what its producing which is its income.

The elements of the fiscal deficit are

·        The revenue deficit, which is the difference between the government’s current (or revenue) expenditure and total current receipts (that is, excluding borrowing) and

·        Capital expenditure.

The fiscal deficit can be financed by borrowing from the Reserve Bank of India (which is also called deficit financing or money creation) and market borrowing (from the money market that is mainly from banks).The money borrowed by a nations government is called public debt. As on any other debt, the Government promises to pay a certain rate of Interest. To pay this interest in the future, the Government has following options:

·        Increase the amount of taxes collected by increasing the tax rates:

·        Help stimulate economic growth so that tax collection automatically increases with it; or

·        Print new currency notes to pay back the debt also called debt monetization

But we can say that first option is not advisable as it will create extra burden on the public & business segments as well. 2^nd option is best out of three where as third option is dangerous as it will cause and lead towards inflation.

Reasons of Fiscal Deficit

In an ideal financial system, which has a balanced fiscal deficit, the cost of expenditure is low while production and growth is advancing. But when there is an increase in fiscal deficit it means that the government is spending too much while it is earning less. Hence, it is important that the government keeps its expenses under control.

·        Government is spending money on unproductive program’s which do not increase economic Productivity. So if govt. is providing amenities to any section of people without creating conditions for them to be more economically productive these kinds of facilities it is spending on unproductive program.

·        It can also mean that the tax collection machinery is not effective so that a significant proportion of people get away without paying their due taxes.

Fiscal deficit does not come about only in case of creating less revenue and spending more money. Another major reason for a growing fiscal deficit can be slow economic growth or sluggish economic activities.

How fiscal deficit can be bad for India?

A large fiscal deficit is an indication that the economy is in trouble and will have reasons to worry. A high fiscal deficit could pose an inflation risk, minimize the growth of the economy, doubt the government’s abilities; it could affect the country’s sovereign rating, which in turn will limit foreign investors from looking at India as one of the investment hubs.

Measure’s to Decrease Fiscal deficit!

Permanent

The government if spends in infrastructure sector like building Roads, Dams, Power Projects, then the money spend by government comes back as earnings of the business entities and their workforce.

In above case, the increased expenditure has further multiplier effects because of the subsequent spending of those whose incomes go up because of the initial expenditure. The overall rise in economic activity in turn means that the government’s tax revenues also increase. Therefore there is no increase in the fiscal deficit in such cases.

Temporary

Curbing import on gold is one of the measures taken by the government to correct the country’s fiscal deficit. But with a weakening rupee and increase in global oil prices, the finance minister might put a cap on the country’s expenditure to avoid pressure on fiscal deficit.

Difference between fiscal deficit and budget deficit

Budget Deficit

·        Budget deficit is commonly known as the national debt.

·        Budget deficit means that a country has more money going out when compared to the money its earning.

·        Budget deficits can usually be resolved by raising taxes, cutting spending or a combination of both.

·        Unlike fiscal deficit, while calculating budget deficit, the country’s borrowings are taken into consideration.

·        India’s budget deficit for the year 2012-13 is 5.2 % of GDP instead of expected 5.3% of GDP. Which will later on worked out on 4.89% of GDP

Fiscal Deficit

·        In case of fiscal deficit, it can be measured without taking into account the interest it pays on its debt.

·        Fiscal deficit is basically the difference between the money it spends and the money it makes.

·        India’s fiscal deficit for year 2012-13 is 4.9% of GDP and estimated fiscal deficit for year 2013-14 is 5.1% of GDP as per budget documents.

Chart below gives snap shot break up of government receipts and % contribution to its sub heads.(% contribution as per data given in FY13 Budget Estimates (BE).

Chart below gives snap shot break up of government expenditure and % contribution to its sub heads.(% contribution as per data given in FY13 BE).

Difference between fiscal deficit and current account deficit

Fiscal Deficit

·        Fiscal deficit is a percentage of the nation’s GDP and can be considered as an economic event in which the government expenditure exceeds its revenue.

Current Account Deficit

·        Current account deficit occurs when the country’s imports are greater than the country’s exports of goods, services and transfers.

Why is India’s fiscal deficit continually high?
While the government fights to manage money, here are a few reasons why India has a soaring fiscal deficit. It is high because in the corporate sector, bailouts are becoming common and subsidies are being high. The money that the government earns through non-tax revenue is not big and the money it earns from taxes is not enough.