Description
Fiscal deficit is defined as the gap between total revenue and total expenditure of the Government in a financial year. The excess of expenditure over revenue is the extent of borrowing Government has to resort to, in order to bridge the deficit. If revenue collected is higher than expenditure then that would be termed as Fiscal surplus. When loans net of recovery is added to the total expenditure and total revenue receipt, including external grants and non-loan capital receipt, is deducted from total expenditure plus loans then it is called as Gross Fiscal deficit. Revenue deficit happen when collections fall short or huge capital expenditure. Generally, capital expenditure is incurred to create long tern assets in the form of buildings, ports, warehouses, roads, etc.
Deficit Financing
One of the ways to resort to deficit financing is by lowering the extant tax rates to stimulate the economy or increasing the government expenditure. Governments/Economists have abandoned balanced budget concept in entirety. Fiscal deficit could also emerge out of government inefficiency, exhibiting rampant tax evasion or wasteful expenditure rather than treading planned budget path announced in the beginning of the financial year. A deficit is financed by raising funds from capital market through issuance of treasury bills, debt paper, and bonds or other way is to borrow from the Central Bank or combination of both.
Fiscal Deficit Status & Future Outlook
While economists advocated fiscal deficit rather than a balanced budget but higher fiscal deficit results in sovereign ratings downgrade by global rating agencies, which, in turn, reduces inflow of foreign direct investments (FDIs) as well as capital market inflows of Foreign Portfolio Investors (FPIs). In order to attract investments from abroad, it is essential to remain relevant by keeping fiscal deficit to a manageable extent besides other economic parameters.
On perusal of combined fiscal deficit figures, it's noticed that fiscal slippages have been moving up during last 2 years, perhaps the reason for negative outlook and rating downgrade to investment just above junk rating, by the global rating agencies. This financial year might see further deterioration in the fiscal deficit due to enhanced fiscal expenditure on account of pandemic. The complete lock-down for more than 2 months for majority of sectors would pose challenges in balancing supply and demand side of the economy. Economists are expecting combined fiscal deficit to touch 10% level during the current fiscal. Since entire world is going through health crisis and facing the effects of complete lock-down, the other economies are also likely to witness GDP contraction and fiscal slippages due to various levels of stimulus packages announced by respective Governments, coupled with complete/partial shutdown of economic activities.
Keep watching this space for more updates on the latest economic position of India!