FISCAL DEFICIT

FISCAL DEFICIT

Subject : Economics

Context : India’s fiscal deficit shot up to 135.1% of the Budget target of nearly ₹8 lakh crore for 2020-21, in the 8 months from April to November 2020, as per data released by the Controller General of Accounts.

Concept :

Fiscal Deficit

• The government describes fiscal deficit of India as “the excess of total disbursements from the Consolidated Fund of India, excluding repayment of the debt, over total receipts into the Fund (excluding the debt receipts) during a financial year”.
• It is calculated as a percentage of Gross Domestic Product (GDP), or simply as total money spent in excess of income.
• Fiscal Deficit = Total expenditure of the government (capital and revenue expenditure) – Total income of the government (Revenue receipts + recovery of loans + other receipts).
• Expenditure component: The government in its Budget allocates funds for several works, including payments of salaries, pensions, etc. (revenue expenditure) and creation of assets such as infrastructure, development, etc. (capital expenditure).
• Income component: The income component is made of two variables, revenue generated from taxes levied by the Centre and the income generated from non-tax variables.
• The taxable income consists of the amount generated from corporation tax, income tax, Customs duties, excise duties, GST, among others.
• Meanwhile, the non-taxable income comes from external grants, interest receipts, dividends and profits, receipts from Union Territories, among others.
• It is different from revenue deficit which is only related to revenue expenditure and revenue receipts of the government.
• The government meets the fiscal deficit by borrowing money. In a way, the total borrowing requirements of the government in a financial year is equal to the fiscal deficit in that year.
• A high fiscal deficit can also be good for the economy if the money spent goes into the creation of productive assets like highways, roads, ports and airports that boost economic growth and result in job creation.
• The Fiscal Responsibility and Budget Management Act, 2003 provides that the Centre should take appropriate measures to limit the fiscal deficit upto 3% of the GDP by 31st March, 2021.
• The NK Singh committee (set up in 2016) recommended that the government should target a fiscal deficit of 3% of the GDP in years up to March 31, 2020 cut it to 2.8% in 2020-21 and to 2.5% by 2023.

Additional Information

Revenue deficit :

• The revenue deficit mentions to the surplus of government’s revenue expenditure over the revenue receipts.
• Revenue deficit = Revenue expenditure – Revenue Receipts
• This deficit only incorporates current income and current expenses. A high degree of deficit symbolises that the government should reduce its expends.

Primary Deficit

• A primary deficit is the amount of money that the government requires to borrow apart from the interest payments on the formerly borrowed loans.
• The aim of quantifying the primary deficit is to concentrate on current fiscal imbalances.
• To attain an approximate of borrowing on account of current expends overreaching revenues, we need to compute what has been known as the primary deficit. It is the fiscal deficit – the interest payments.
• Gross primary deficit = Gross fiscal deficit – Net interest liabilities
• Net interest liabilities comprise of interest payments – interest receipts by the government on net domestic lending.