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.