The Explainer: Understanding Fiscal Deficit

Continuing with the Explainers in the 'Understanding the Budget Series', this post will dwell on the idea of Fiscal Deficit, a crucial factor in ensuring a stable economic environment. 

(Read The Explainer: Budget Terminology - Part I and Part II)

What is Fiscal Deficit?

Fiscal Deficit is defined as the difference between the government's total expenditure and the total non-debt creating receipts.

What types of receipts are non-debt creating?

Revenue Receipts, Recoveries of Loans, and Other Receipts are all non-debt creating. This means that the government does not have to borrow to generate these sources of income.

Now, look at the accompanying table: Fiscal Deficit is numbered 22, Revenue Receipts is 1, Recoveries of Loans is 5 and Other Receipts is numbered 6.

Hence,

(22) Fiscal Deficit = (16) Total Expenditure – [(1) Revenue receipts + (5) Recoveries of loans + (6) Other Receipts]

Revenue Receipts would include both tax and non-tax revenue of the Government of India (GoI).

What is tax revenue? 

This refers to revenue that the GoI gets by way of collecting taxes, like Personal Income Tax, Corporate Tax (charged on incomes of companies), Central Sales Tax and Service Tax.

What is Non-tax revenue? 

This would include Stamp Duty and Dividends earned from Public Sector Units (PSUs). Dividend is the return on capital invested by the government in PSUs.

Sometimes the government of India receives money that it would have lent to some country/organisation in the past. When such money is received, it is recorded under the ‘Recoveries of Loans’ head.

When does Fiscal Deficit arise?

Fiscal Deficit arises when the government has expenditure higher than the revenue it generates. To bridge this expenditure-revenue deficit, the government resorts to borrowing. This borrowing is called Fiscal Deficit.

In short, fiscal Deficit is the total borrowing of the government of India to fund the allocations and expenditures listed in the Union Budget.

In the table above, the Revised Estimates for 2014-15 show a Fiscal Deficit of Rs5,12,628 crore. In other words, what this figure means is that the Government of India is borrowing this huge amount of money in 2014-15! Yes, you got it right: a total borrowing of mind-numbing Rs5.12 lakh crore in one year!

Fiscal Deficit is usually expressed in terms of percentage of the country’s Gross Domestic Product (GDP).

Now, go to the bottom of the table. It is mentioned that India’s GDP in 2014-15 will be Rs12653762 crore; yes, you read it right: Rs126 lakh crore!

Taking India’s GDP to be Rs12653762 crore in 2014-15, the Fiscal Deficit of Rs5.12 lakh crore works out to 4.1% of GDP.

So, to say that we are living way beyond our means would be an understatement. While the government has done well to stick to the targeted Fiscal Deficit (see Budget Estimates and Revised Estimates for 2014-15), one that is high could spell doom for the economic growth of the country.

The next post will focus on the adverse consequences of Fiscal Deficit.