FISCAL DEFICIT

FISCAL DEFICIT

Subject : Economy

Context : The aggregate fiscal deficit of States is likely to be at 4.3% of the gross domestic product (GDP) in 2021-22 compared with 4.6% in 2020-21, says a report by India Ratings and Research.

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”.
• The government that has a fiscal deficit is spending beyond its means.
• It is calculated as a percentage of Gross Domestic Product (GDP), or simply as total money spent in excess of income.
• In either case, the income figure includes only taxes and other revenues and excludes money borrowed to make up the shortfall.

Formula:

• 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.