Fiscal Deficit

GS3 – Economy

  • Fiscal Deficit refers to the excess of the government’s total expenditure over its total revenue receipts (excluding borrowings) in a given financial year.
  • It indicates how much the government needs to borrow to meet the gap between income and expenditure.
Formula:

Fiscal Deficit = Total Expenditure − (Revenue Receipts + Non-Debt Capital Receipts)

Where,

  • Revenue Receipts = Tax revenue + Non-tax revenue
  • Non-debt Capital Receipts = Recoveries of loans + Disinvestment proceeds
Causes of Fiscal Deficit in India
  • High Revenue Expenditure – subsidies (food, fertilizer, fuel), salaries, pensions, interest payments.
  • Slow Revenue Growth – poor tax compliance, tax concessions, slowdown in economic activity.
  • Populist Schemes – welfare commitments, loan waivers.
  • Low Non-Tax Revenue – fall in dividends, spectrum auction proceeds, etc.
  • Capital Expenditure Commitments – infrastructure, defence.
Impact of Fiscal Deficit

Positive:

  • Provides funds for developmental expenditure.
  • Stimulates demand during slowdown (counter-cyclical policy).

Negative:

  • Leads to inflationary pressure if financed through borrowing from RBI.
  • Crowding out of private investment due to higher government borrowing.
  • Increases interest burden and inter-generational debt.
  • Affects sovereign credit ratings and foreign investor confidence.
Measurement Indicators
  1. Fiscal Deficit to GDP Ratio – benchmark of fiscal prudence.
  2. Primary Deficit = Fiscal deficit – Interest payments.
    • Indicates how much of borrowing is for meeting interest obligations.
  3. Effective Revenue Deficit = Revenue Deficit – Grants for creation of capital assets.
Legal and Policy Framework in India
  • Fiscal Responsibility and Budget Management (FRBM) Act, 2003
    • Aimed to ensure fiscal discipline.
    • Targets: reduce fiscal deficit to 3% of GDP.
    • Escape clauses allowed for shocks like war, calamity, or structural reforms.
  • NK Singh Committee (2017)
    • Suggested a debt-to-GDP ratio of 60% by 2023 (40% Centre, 20% States).
    • Recommended fiscal deficit glide path to 2.5% of GDP.
Way Forward
  1. Enhance Revenue – Widen tax base, improve GST compliance, rationalise exemptions.
  2. Expenditure Rationalisation – Reduce subsidies, improve efficiency in welfare delivery.
  3. Boost Capital Spending – Prioritise infrastructure and productive investment.
  4. Disinvestment & Asset Monetisation – Unlock resources from PSUs.
  5. Reform FRBM Act – Introduce flexibility with strict oversight mechanisms.
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