Fiscal Deficit

Notes

The fiscal deficit is the gap between the Government's total expenditure and its total receipts excluding borrowings. It equals the Government's net borrowing requirement for the year.

Fiscal Deficit = Total expenditure - (Revenue receipts + Non-debt capital receipts)

Non-debt capital receipts are the recovery of loans and disinvestment/other capital receipts.
Equivalently: Fiscal deficit = Revenue deficit + Capital expenditure - Non-debt capital receipts.

Related measures

Primary deficit = Fiscal deficit - Interest payments. It shows the current-year imbalance without the burden of past debt. A primary surplus means interest is being paid from non-borrowed revenue.
Net fiscal deficit = Gross fiscal deficit - net lending.

Financing the deficit

Market borrowings (dated government securities, Treasury bills), small savings (NSSF), external borrowing, and use of cash balances.
Printing money (monetisation) is restricted: the FRBM Act, 2003 barred the RBI from directly subscribing to G-secs from April 2006.

Implications of a high fiscal deficit

Crowding out of private investment through higher interest rates; inflation if monetised; a rising interest burden; pressure on the current account (the twin deficit problem); and weaker sovereign credit ratings.
A deficit used for capital expenditure is less harmful than a deficit used for consumption.

Targets and trend

The FRBM Act set a fiscal deficit target of 3% of GDP. The N.K. Singh Committee (2017) retained it with an escape clause.
Trend (approximate, % of GDP): 2019-20: 4.6%, 2020-21: 9.2% (Covid), 2021-22: 6.7%, 2022-23: 6.4%, 2023-24: 5.6%, 2024-25: 4.8%. The target for 2025-26 was 4.4%, with a shift to a debt-to-GDP anchor thereafter.

Key Points

Fiscal deficit = total expenditure - total receipts excluding borrowings = borrowing requirement.
Primary deficit = fiscal deficit - interest payments.
Financed by market borrowings, small savings and external loans.
Effects: crowding out, higher interest burden, possible inflation.
FRBM target: 3% of GDP; Covid pushed it to about 9%.

MCQs

Q1. The fiscal deficit represents the Government's: (a) Total expenditure (b) Net borrowing requirement (c) Revenue deficit (d) Interest payments Ans: (b).

Q2. A primary deficit is calculated as: (a) Fiscal deficit minus interest payments (b) Revenue deficit minus capital receipts (c) Fiscal deficit plus interest payments (d) Revenue expenditure minus tax revenue Ans: (a).

Q3. Which of the following is a non-debt capital receipt? (a) Market borrowings (b) Recovery of loans (c) Treasury bills (d) External loans Ans: (b).