FISCAL DEFICIT REACHES 120% OF ANNUAL TARGET

CONTEXT:

The Union Government’s fiscal deficit further widened to ₹9.53 lakh crore, or close to 120% of the annual budget estimate, at the end of October of the current fiscal (2020-21).

DETAILS:

  • The deficit widened mainly due to poor revenue realisation.
  • The fiscal deficit or gap between the expenditure and revenue had breached the annual target in July this year.

FISCAL DEFICIT:

  • Fiscal deficit is the difference between the government’s total expenditure and its total receipts (excluding borrowing). A fiscal deficit occurs when this expenditure exceeds the revenue generated.

FORMULA:

  • Fiscal Deficit = Total Expenditure (Revenue Expenditure + Capital Expenditure) – (Revenue Receipts + Recoveries of Loans + Other Capital Receipts (all Revenue and Capital Receipts except loans taken))

Components of Fiscal Deficit:

The two components of the fiscal deficit are income and expenditure.

Income:
Total income generated by the government can be divided into:

  1. Tax revenue: GST, customs duties, corporate tax, etc.
  2. Non-tax revenue: dividends and profits, interest receipts, etc.

Expenditure: this includes capital expenditure, revenue expenditure, grants for capital assets creation, interest payments, etc

FINANCING OF FINANCIAL DEFICT:

There are two sources to finance the fiscal deficit. They are:

  1. Borrowings: internally from a commercial bank, or from external sources like the IMF, other governments, etc.
  2. Deficit financing (that is, printing new currency): borrowing funds from RBI against its securities (so, RBI prints new currency).

MAIN POINTS:

  • The government meets the fiscal deficit by borrowing so, it can be said that the total borrowing requirements of a government in a year is equal to the fiscal deficit of that year.
  • In India, the Fiscal Responsibility and Budget Management Act suggests that bringing the fiscal deficit down to about 3 percent of the GDP is the ideal target.
  • However, successive governments have not been able to achieve this target.
  • For the financial year, the government had pegged the fiscal deficit at Rs 7.96 lakh crore or 3.5 per cent of the GDP in the budget, presented by the Finance Minister in February 2020.

SOURCE: ECONOMIC TIMES

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