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"Funda of Fiscal Deficit"

Fiscal deficit is the difference between the government's total expenditure and the non-debt creating receipts of the government. In the government budget account, all the receipts excluding the borrowings constitute non debt creating receipt. Thus in simplistic terms, if the government's total expenditure is equal to the total receipts in the revenue account, and then fiscal deficit will be equal to the fiscal deficit.
Fiscal Deficit

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Published : Wednesday, 25 January, 2017 10:30 AM

 

Funda of Fiscal Deficit

 

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Read Current Affairs Topic:  Funda of Fiscal Deficit

Fiscal deficit is the difference between the government’s total expenditure and the non-debt creating receipts of the government. In the government budget account, all the receipts excluding the borrowings constitute non debt creating receipt. Thus in simplistic terms, if the government’s total expenditure is equal to the total receipts in the revenue account, and then fiscal deficit will be equal to the fiscal deficit.

 

Other Concepts of Deficit

Apart from fiscal deficit, the government releases three more kinds of deficits –

  1. Budgetary Deficit

Budgetary deficit is the difference between total receipts and total expenditure. Since the year 1997, this type of deficit has become redundant as government switched over to fiscal deficit.

  1. Revenue Deficit

Revenue deficit is the difference between the receipts and expenditure in revenue account of budget only. Entries of capital account are ignored in revenue deficit.

  1. Primary Deficit

When the interest payments paid during a year are excluded from the fiscal deficit, what we get is primary deficit.

  1. Monetized Deficit

Monetized deficit Also known as the ‘net reserve bank credit to the government’, it is that part of the government deficit which is financed solely by borrowing from the RBI. It increases the money supply and therefore is inflationary in nature.

 

Performance of Fiscal Deficit Front

For the current fiscal year, the fiscal deficit target set by the government in Budget 2016-17 is 3.5% of the GDP or INR 5.33 lakhs crore. The target is under some stress because of the burden from higher salaries to government staff under the Seventh Pay Commission recommendations. In the fiscal year 2015-16, the target was set at 3.9% which was achieved.

 

Future Course of Deficit

As per the fiscal consolidation map outlines in Budget 2015-16, fiscal deficit was expected to be brought down to 3.9% in 2015-16, 3.5% in 2016-17 and 3% in 2017-18. In the current fiscal year, fiscal deficit was 85.5% of the budgetary estimate by the end of November 2016. The Finance Minister ArunJaitely recently said the government will be able to reach the target as demonetization will also reduce the deficit.

However, in the year 2017-18, government may deviate of defer the fiscal consolidation map outlined in Budget 2015-16 as Bank of America Merill Lynch has expected the in the ensuing year, government may set the fiscal deficit target of 3.5%. The financial service major recommended a relaxation in the fiscal deficit to fight the economic recession.

 

Causes of High Fiscal Deficit

Fiscal deficit may increase because of following reasons:

  • Increase in the government borrowing
  • Fall in tax collection
  • Poor performance by public sector undertakings
  • Rise in interest payments
  • Increase in subsidy
  • Increase in capital expenditure
  • Defence expenditure

In any given year, if capital expenditure in increased, it will negatively affect the fiscal deficit in that particular year but if the capital expenditure is spent in building social and economic infrastructure, then in the ensuing years, it will assist in improving the economic activity, increase the government and thus reduce the fiscal deficit in  future. But if the expansion in fiscal deficit is due to the unplanned expenditure which do not ensure returns in the future, then it will further deteriorate the fiscal deficit in future.

 

Impact of High Fiscal Deficit

A continuing high fiscal deficit may lead to the following consequences:

  • A high fiscal deficit is inflationary in nature. If the share of government borrowings from the RBI is higher, it will directly increase the general price level.
  • High fiscal deficit also ‘crowds out’ the private investment as increased government borrowing reduces the funds available for private sector in the market adversely affecting the overall performance of private sector.
  • High fiscal deficit also discourages Foreign Direct Investment (FDI) in an economy.
  • It also diminishes the chances of overall high GDP growth rate.
  • High fiscal deficit also affects the fiscal consolidation in future as increased borrowings means in rise in interest payments in the future and government may ultimately fall into a debt trap.

 

However, the fiscal deficit is not entirely a bad phenomenon and during the slowdown or recession, when the private activity in the economy is under-performing, government may resort to fiscal deficit to boost the economic activity. Economic experts believe that fiscal deficit at 3.0% is the safe and sustainable for the economy. In accordance with the prevailing economic situation, government may increase or decrease the fiscal deficit.

 

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