Fiscal
Deficit
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This is the discussion outline
Definition of Fiscal Deficit
Causes of Fiscal Deficit
Measuring Fiscal Deficit
Indian Budget Deficit
Impacts of Fiscal Deficit
Financing Fiscal Deficit
Fiscal Deficit in India
Method to reduce Fiscal Deficit
Fiscal Deficit vs Budget Deficit
FRMB ACT
What is Fiscal Deficit
Fiscal deficit refers to the difference
between a government's total expenditures
and its total revenues, excluding money
borrowed. It is an important economic
indicator that reflects the financial health
and fiscal policies of a country.
Causes of Fiscal
Deficit
These are the main causes of fiscal deficit
High Government
Low Tax Revenues Debt Servicing
Spending
Excessive government Inefficient tax collection, Repayment of interest
spending on tax evasion, and economic and principal on
programs, public slowdowns can result in government debt can
services, and social lower tax revenues and a significantly contribute
welfare can lead to a widening fiscal deficit. to the fiscal deficit.
fiscal deficit.
Measuring Fiscal Deficit
Formula :- Fiscal deficit = Total expenditure - Total revenue
Ex. Given, total expenditure-30,000 & total revenue-25000
Sol. FD=TE-TR
FD=30000-25000
FD=5000
Importance of Measurement:
Allows for assessment of fiscal sustainability.
Helps in making informed policy decisions.
Indian Budget
Deficit
The budget deficit in India occurs when the government's total expenditure
surpasses its total revenue.
Recent Statistics (as of FY 2023-24):
Total Expenditure: ₹39.45 lakh crore
Total Revenue: ₹22.84 lakh crore
Budget Deficit: ₹16.61 lakh crore
Deficit as Percentage of GDP: Approximately 5.9%
Key Factors Contributing to the Deficit:
Increased Public Spending: Investment in infrastructure, healthcare, and social
welfare.
Economic Recovery Measures: Stimulus packages post-COVID-19.
Global Economic Conditions: Inflation and rising commodity prices affecting
revenue.
Impacts of Fiscal
Deficit
Fiscal deficit occurs when a government's total expenditures exceed its
total revenues, excluding borrowing. Financing the deficit can have various
impacts, both positive and negative. Here’s a breakdown of these impacts:
Positive Negative
Impacts:
Impacts:
Stimulates Economic Growth Increased Debt Levels
Infrastructure Development Higher Interest Rates
Social Welfare Programs Inflationary Pressure
Counter-cyclical Measures Reduced Investor Confidence
Investment in Future Interference with Future Budgets
Financing Deficit
A financing deficit occurs when an individual's or organization's
expenses exceed its income or revenues over a specific period.
Essentially, it means that there is a shortfall in funding to cover
obligations, such as loans, bills, or other expenses.
Here are a few key points about financing deficits:
Causes
Impact
Solutions
Long-term Strategy
Fiscal Deficit in
India
India’s fiscal deficit for FY 2023-24 was recorded at 5.6% of
GDP, improving slightly from the budget estimate of 5.9%.
This was largely due to robust tax collections, particularly in
direct taxes, which saw substantial growth.
The total fiscal deficit amounted to ₹16.5 lakh crore, driven by
increased capital expenditure aimed at boosting infrastructure
and long-term growth.
The government remains on track with its fiscal consolidation
plans, targeting a reduction in the deficit to below 4.5% of GDP
by FY 2025-26
Method to reduce
fiscal deficit
Here are six of the most effective ways to reduce the fiscal deficit:
Tax Reforms: Broadening the tax base, improving GST compliance, and better tax
administration can boost government revenue.
Subsidy Rationalization: Reducing unnecessary subsidies (e.g., fuel and food) and
implementing targeted, efficient delivery systems like Direct Benefit Transfer (DBT).
Disinvestment and Privatization: Selling stakes in public sector enterprises
generates revenue and reduces the burden on government finances.
Expenditure Control: Rationalizing non-essential spending and focusing on
productive capital expenditures.
Public-Private Partnerships (PPP): Using PPPs for infrastructure development can
share financial responsibility and reduce the fiscal burden.
Fiscal Deficit vs Budget Deficit
Fiscal Deficit
Budget Deficit
Budget deficit refers to the
The fiscal deficit is the shortfall between the
difference between the government's total expenditure
government's total expenditure and its total receipts (which
(both revenue and capital include both revenue receipts
expenditure) and its total and capital receipts).
revenue (excluding borrowing). A budget deficit shows that a
It shows how much the government is spending more
government needs to borrow to than it is earning in a given fiscal
meet its expenditure year.
The Fiscal Responsiblity and Budget Management
Act (FRMB) Act
The Fiscal Responsibility and Budget Management (FRBM) Act,
passed by the Indian Parliament in 2003, aims to bring fiscal
discipline and ensure that the government does not overspend
beyond its means. The Act's primary objectives are to reduce India's
fiscal deficit, improve macroeconomic stability, and promote long-
term economic growth by controlling public debt. The FRBM Act is
crucial because it curtails excessive government borrowing, ensuring
a sustainable debt-to-GDP ratio, and contributes to investor
confidence and economic stability.
ARYAN THAKKAR CHIRAG NAHAR
CHAITANYA BISHNU
CHRISH GANDHI
