Fiscal Deficit

#GS3 #Economy

Fiscal Deficit has continued to soar in September to reach Rs 9.1 lakh crore, or almost 115% of the budget target of Rs 7.96 lakh crore for 2020-21, as per the CAG.


What is ‘Fiscal Deficit’?

  • Fiscal Deficit is the difference between the total income of the government (total taxes and non-debt capital receipts) and its total expenditure.
  • A fiscal deficit situation occurs when the government’s expenditure exceeds its income. This difference is calculated both in absolute terms and also as a percentage of the Gross Domestic Product (GDP) of the country.
  • A recurring high fiscal deficit means that the government has been spending beyond its means.
  • 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”.


Income and Expenditure of Government 

  • Revenue receipts of the government – Corporation Tax, Income Tax, Custom Duties, Union Excise Duties, GST and taxes of Union territories. Note – GST or Goods and Services Tax which is collected by the Centre includes CGST (Central Goods and Services Tax), IGST (Integrated Goods and Services Tax) & GST Compensation Cess.
  • Non-tax revenues – Interest Receipts, Dividends and Profits, External Grants, Other non-tax revenues, Receipts of union territories.
  • Expenditure of Government – Revenue Expenditure, Capital Expenditure, Interest Payments, Grants-in-aid for creation of capital assets.


Capital Receipts 

  • All non-revenue receipts of a government are known as capital receipts. Such receipts are for investment purposes and supposed to be spent on plan-development by a government.
  • The capital receipts in India include the following –
  • Loan Recovery – The money the government had lent out in the past in India (states, UTs, PSUs, etc.) and abroad their capital comes back to the government when the borrowers repay them as capital receipts.
  • Borrowings by the Government –  This includes all long-term loans raised by the government inside the country (i.e., internal borrowings) and outside the country (i.e., external borrowings).
  • Other receipts by the Government – This includes many long-term capital accruals to the government through the Provident Fund (PF), Postal Deposits, various small saving schemes (SSSs) and the government bonds sold to the public (as Indira Vikas Patra, Kisan Vikas Patra, Market Stabilisation Bond, etc.).


Capital Expenditure 

  • It includes so many heads in India –
  • Loan disbursals by the Government – The loans forwarded by the government might be internal (i.e., to the states, UTs, PSUs, FIs, etc.) or external (i.e., to foreign countries, foreign banks, purchase of foreign bonds, loans to IMF and WB, etc.).
  • Loan repayments by the Government – Again loan payments might be internal as well as external. This consists of only the capital part of the loan repayment.
  • Plan expenditure of the Government – This consists of all the expenditures incurred by the government to finance the planned development of India as well as the central government financial supports to the states for their plan requirements.
  • Capital Expenditures on Defence by the Government – This consists of all kinds of capital expenses to maintain the defence forces, the equipment purchased for them as well as the modernisation expenditures.
  • General Services – These also need huge capital expenditure by the government—the railways, postal department, water supply, education, rural extension, etc.
  • Other liabilities of the Government – Basically, this includes all the repayment liabilities of the government on the items of the Other Receipts.


How is Fiscal Deficit calculated?

  • Fiscal Deficit = Total expenditure of the government (capital and revenue expenditure) – Total income of the government (Revenue receipts + recovery of loans + other receipts)
  • If the total expenditure of the government exceeds its total revenue and non-revenue receipts in a financial year, then that gap is the fiscal deficit for the financial year.
  • The fiscal deficit is usually mentioned as a percentage of GDP. For example, if the gap between the Centre’s expenditure and total income is Rs 5 lakh crore and the country’s GDP is Rs 200 lakh crore, the fiscal deficit is 2.5% of the GDP.


What causes fiscal deficit?

  • Sometimes, the governments spend on handouts and other assistance to the weak and vulnerable sections of the society such as the farmers and the poor.
  • 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 government meets 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.
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