Budget FAQs: What is fiscal deficit?

Budget FAQs: What is fiscal deficit?

Representative image. (iStock Photo)

Finance Minister Nirmala Sitharaman is set to present her second Union Budget on February 1, 2020. This is the second budget that Sitharaman will be presenting under the Prime Minister Narendra Modi's government. 

As the buzz around the upcoming budget is rising, DH explains what a fiscal deficit is. 

What is a fiscal deficit?

It is the difference between the government's total expenditure and its total revenues excluding money generated from borrowings.

What happens if fiscal deficit shoots up?

The government has to borrow more or ask RBI to print more money. But the printing of currency has its side effects. It leads to inflation and raises interest rates. Therefore, no government wishes to finance the fiscal deficit by printing money. It prefers borrowing.

Where does the government borrow from?

Market, small savings fund, state provident funds, external sector and short term funds. Market borrowing, however, is the major source to finance the fiscal deficit.

Borrowing too has an adverse impact?

Yes. If the government borrows more, it leaves a little room for the private sector and corporates to access the market. Also, large govt borrowing shoots up interest rates for all other borrowers. Besides, it increases the debt repayment burden of the government and also pushes up the rate of investment in the economy which in turn leads to a slow down.

Why is the fiscal deficit number so keenly observed?

It reveals the overall strength in an economy. Global investors watch the number as they fear a high fiscal deficit may crowd them out from the market and high inflation and high-interest rate regime can impact their profitability.

How much fiscal deficit a country can afford to have?

The fiscal deficit should not be more than 3%-4%. But in a developing economy, where tax revenues are not enough to finance the growing expenses of the government, a fiscal deficit can go a little higher.

Fiscal deficit in India's context?

India came up with the Fiscal Responsibility and Budget Management (FRBM) Act in 2003 with an objective to reduce the fiscal deficit to 3% of GDP by 2008-09 with an annual reduction of 0.3% per year. It never happened and the govt kept on relaxing the target year after year. Last year, it amended the FRBM rules and extended the timeline of meeting the target of 3% to 2020-21.

Should India be obsessed to meet fiscal deficit target?

With new GST regime bound to have some teething problems, economists allow a small slippage but rating agencies and International Monetary Fund recommend strict adherence to target.

How did the numbers move over the years?

From a high of 5.9% in 2011-12, fiscal deficit has been brought down to 3.5% in 2017-18. The target was to achieve 3.3% in 2018-19. During the Budget in July 2019, Finance minister Nirmala Sitharaman reduced the fiscal deficit target to 3.3% from an earlier 3.4% for 2019-20 in a move that signalled the government's commitment to fiscal consolidation.