Fiscal Deficit (India) – What’s That?

The fiscal deficit is the difference between the government’s total expenditure and its total receipts (excluding borrowing). The elements of the fiscal deficit are (a) the revenue deficit, which is the difference between the government’s current (or revenue) expenditure and total current receipts (that is, excluding borrowing) and (b) capital expenditure. The fiscal deficit can be financed by borrowing from the Reserve Bank of India (which is also called deficit financing or money creation) and market borrowing (from the money market that is mainly from banks).

Components of fiscal deficit

The primary component of fiscal deficit includes revenue deficit and capital expenditure.

Revenue deficit: Revenue deficit is the difference between the revenue expenditure and the revenue receipts (the recurring income for the government). When a country runs a revenue deficit it means that the government is unable to meet its running expenses from its recurring income. To put it simply

Revenue Deficit = Revenue Expenses – Revenue Receipts.

Revenue expenditure is the expense incurred for the normal running of the Government’s various departments and services, interest charged on debt incurred by Government, subsidies etc., whereas Revenue receipts consist of tax collected by the government and other receipts consisting of interest and dividends on investments made by Government, fees and other receipts for services rendered by government.

Capital expenditure: It is the fund used by an establishment to produce physical assets like property, equipments or industrial buildings. Capital expenditure is made by the establishment to consistently maintain the operational activities. For example money spent on building of hospitals, dams, roads, etc.

Impact of Fiscal Deficit financing

A deficit is financed through government borrowings or through printing of additional currency notes. Of these two, borrowing money is a better option because if the government were to print more notes it would increase supply of money in the economy thereby reducing its buying power and causing inflation. Therefore, borrowing from the market is a better option as it does not alter money supply. But this too has its own disadvantages. Borrowing money from the market cannot be an endless strategy purely because there is limited money in the market and thus needs to be made available for other borrowers as well. Too much borrowing will drive up interest rates making credit expensive and thereby affecting the overall demand in the economy.

The Fiscal deficit for FY09BE stood at 2.5%, while under the revised estimates the fiscal deficit is expected to increase to 6% of the GDP.