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
- Fiscal Deficit to GDP Ratio – benchmark of fiscal prudence.
- Primary Deficit = Fiscal deficit – Interest payments.
- Indicates how much of borrowing is for meeting interest obligations.
- 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
- Enhance Revenue – Widen tax base, improve GST compliance, rationalise exemptions.
- Expenditure Rationalisation – Reduce subsidies, improve efficiency in welfare delivery.
- Boost Capital Spending – Prioritise infrastructure and productive investment.
- Disinvestment & Asset Monetisation – Unlock resources from PSUs.
- Reform FRBM Act – Introduce flexibility with strict oversight mechanisms.