Union Budget 2025 | FAQs: What is fiscal deficit?

The Union Budget for the upcoming financial year is all set to be presented on February 1, 2025, by Finance Minister Nirmala Sitharaman.

In light of the upcoming Budget, we take a look at some of the terms associated with the exercise.

What is fiscal deficit?

Fiscal deficit, a critical measure of a government's financial health, reflects the difference between its total revenue and total expenditure. It's an indicator of how much the government needs to borrow to meet its expenses when its revenues are insufficient. In the context of India's budget, understanding the fiscal deficit is essential to grasp the nation's economic challenges and policy direction.

Fiscal deficit and the health of the economy

India, a rapidly developing economy, faces a complex interplay of growth, inflation, and fiscal responsibility. The fiscal deficit is prominently featured in India's annual budget, a comprehensive financial statement of the government's planned revenue (from taxes, non-tax revenues, and other sources) and expenditures (including public services, infrastructure, subsidies, and interest payments). When the government's expenditure exceeds its revenue, a fiscal deficit occurs. This gap is typically financed through borrowing, both domestically and internationally.

For India, a manageable fiscal deficit is crucial for sustainable economic growth. A high fiscal deficit may signal excessive government spending, potentially leading to inflationary pressures. It can also crowd out private investment, as the government competes with private entities for limited financial resources. Conversely, a very low fiscal deficit, while indicating fiscal prudence, may suggest underinvestment in essential sectors like healthcare, education, and infrastructure, which are vital for long-term growth.

In recent years, India's fiscal deficit has been a subject of intense debate. On one hand, there's a need for fiscal consolidation to maintain macroeconomic stability and to keep debt at sustainable levels. On the other hand, strategic fiscal expansion is often advocated to stimulate economic growth, especially in times of slowdown or crisis, such as during the Covid-19 pandemic.

The balancing act for the Indian government lies in maintaining a fiscal deficit that supports growth and development without compromising financial stability. This involves prudent expenditure management, efficient tax collection, and strategic policy interventions. The government's approach to managing the fiscal deficit is closely watched by investors, international agencies, and rating firms, as it influences India's credit ratings and investment attractiveness.

India's budgetary decisions regarding its fiscal deficit have far-reaching implications, impacting everything from inflation and interest rates to investment climate and socio-economic development. Hence, understanding the fiscal deficit in the context of India's budget is key to comprehending the broader economic picture and the government's policy priorities.

(Disclaimer: This copy has been written by a generative AI tool and has been reviewed and edited by the DH Web Desk)