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Volume IconWhat is Fiscal Deficit?

Equity markets will have a reason to cheer if the government reins in its fiscal deficit target at 6.25% of gross domestic product, a recent survey claimed. Find out how the government manages it

Illustration: Binay Sinha

In its Union Budget documents, the Centre shows the revenue deficit, the primary deficit and the fiscal deficit. Of them, the fiscal deficit is closely watched during the budget. Let us understand what it means.

The fiscal deficit of a country is calculated as a percentage of its GDP and for the current financial year, the government expects the deficit at 6.8% of GDP.

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In simple terms, it is the shortfall in the government’s revenue compared to its expenditure or when the government spends beyond its income. 

The fiscal deficit calculations are based on two components -- Total receipts and Total Expenditure.

Receipts include tax revenue from corporation tax, income tax, GST, customs duties and non-tax revenues such as external grants, interest receipts, dividends and profits, and receipts from Union Territories, among others.

Capital receipts like recoveries of loans and advances, disinvestment proceeds are also part of total income of the government. 

While expenditure carried out through various ministries are divided into two categories, capital and revenue. Interest payments are part of revenue expenditure and loans disbursed come under capital expenditure.

 Finally, subtracting Total Expenditure from Total Income gives the fiscal deficit. 

Revenue Deficit refers to the excess of revenue expenditure over revenue receipts and Primary Deficit is measured as Fiscal Deficit less interest payments.

Fiscal deficit is mainly financed through market borrowings. For this purpose, the government issues various instruments like Treasury Bills and Bonds. 

A budget surplus is a rare phenomenon and most countries continue to have a deficit. A high deficit at times also emerges if the government is spending on developmental works like construction of highways, ports, roads and airports. And it is a good sign.

The central government’s fiscal deficit for April to November 2021, the first eight months of the current fiscal year, narrowed to 46.2% of the annual budget target, helped by a rise in tax collections, official data showed recently. 

In actual terms, the deficit stood at Rs 6.96 trillion at the end of November 2021 against the annual estimate of Rs 15.06 trillion, according to the Controller General of Accounts (CGA).

Officials privy to budget-making exercise recently told a news agency that the government was aiming for a less ambitious fiscal deficit of 6.3% to 6.5% of GDP for the next financial year due to the pandemic.

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First Published: Jan 20 2022 | 8:45 AM IST

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