Budget 2021 | What is fiscal deficit?

The Union Budget for the financial year 2022 will be presented by Finance Minister Nirmala Sitharaman on February 1, 2021. The budget comes in the backdrop of an economic contraction of 7.7 per cent — the first time in the history of independent India.

As stakeholders expect the upcoming Budget to provide a healing touch to the coronavirus-battered economy, let us take a look at 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.

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.

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.

Does borrowing too have 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.

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.

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 government kept on relaxing the target year after year. In 2019, it amended the FRBM rules and extended the timeline of meeting the target of 3% to 2020-21.

How did the numbers move over past years?

For this 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 Union Budget, which was presented by Sitharaman in February 2020. Fiscal deficit had soared to a seven-year high of 4.6 per cent of the gross domestic product in 2019-20, mainly due to poor revenue realisation. The Union government's fiscal deficit soared to Rs 10.75 lakh crore, or 135.1 per cent of the 2020-21 Budget Estimates (BE), at the end of November 2020, mainly on account of low realisation of revenue due to disruption in business activities amid the coronavirus pandemic.