What is Fiscal Deficit? Effects of Fiscal Deficits on Indian Economy

30 January, 2024

In order to properly gauge the measures proposed in the Union Budget, it is essential to understand the meaning of certain financial terms. One such term is ‘fiscal deficit’.

The term ‘fiscal’ is used to describe something related to government revenue, spending or taxes. ‘Deficit’ is when the expenses exceed the revenue. A fiscal deficit, being the difference between the government’s expenses and revenue, is not necessarily a bad thing. There could be a deficit due to several reasons. However long-term deficits may impact economic stability.

When it comes to the yearly Union Budget, the Finance Minister talks about the fiscal deficit in details. The fiscal deficit for the upcoming financial year is estimated. The Finance Minister also provides an estimate of the expenditure and revenue amount, as well as the amount that the government must raise to finance the fiscal deficit. The government also allows states a percentage of the Gross State Domestic Product (GSDP) as fiscal deficit.

Therefore, read on to understand what is meant by fiscal deficit and how it impacts economy. 

What is Fiscal Deficit?

Fiscal deficit is defined as the difference between the total revenue and total expenditure of the government. It helps indicate the total borrowing that the government would need in a particular financial year.

Since fiscal deficit is the difference between the expenditure and income of the government, let’s examine what those two variables constitute. The government's leading source of revenue is through GST and taxes like income tax, customs duties, corporate tax, etc., along with non-tax income from disinvestment, interest, dividends, and so on. On the other hand, the government’s expenditure consists of capital expenditure, interest payments, and revenue payments, among others.

Here’s a quick look at the formula to calculate fiscal deficit:

Fiscal Deficit = Government Revenue – Government Expenditure

When a country's government expenditure is in excess of total revenue, it is said to be in fiscal deficit. this is true for most countries in the world and does not mean that the nation is not economically sound. There can be various reasons why a nation has a high fiscal deficit, and to understand the same, the revenue and expenditure must both be looked at closely.

When discussing fiscal deficit, it is also important to talk about primary deficit, which refers to the difference between the current fiscal deficit and interest paid on previous government loans. When the primary deficit of a country shrinks, it indicates that the fiscal health of the economy is recovering.

Why is fiscal deficit important for the economy? 

When it comes to the impact of fiscal deficits, there are various opposing perspectives. On one hand, it is believed that fiscal deficits can boost a sluggish economy by increasing the spending power of people for investment. However, on the other hand, it is also believed that long-term deficits can negatively impact economic growth and stability.

The fiscal deficit is keenly observed during the Union Budget presentation as it can impact various factors such as growth, stability of price, production costs, and inflation. If the fiscal deficit is large enough, it can also affect the country’s ratings.

For instance, when the government continues borrowing and stops printing currency notes, there is an upwards pressure on interest rates. Increased interest rates then result in increased production costs which lead to higher prices. However, the impact of fiscal deficit on inflation depends on the kind of expenditure undertaken by the government. For instance, if the government spends on productive investments that take care of both supply and demand, the impact might be reduced. Fiscal deficits can help a slow economy, especially if the money is spent on productive assets that create investment and job opportunities.

​​​​​​​*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.