With just a day before the Union Budget announcement, one of the many terms that you will see pop up frequently is Fiscal deficit. The word ‘Fiscal’ means ‘related to the government’s revenue, especially taxes’ and ‘Deficit’ is defined as a ‘ shortage’, ‘difference’ or ‘an amount by which there is a shortfall’.
Thus ‘Fiscal Deficit’ can be defined as the difference between what the government spends by way of its expenditure and what it collects by way of revenue during the year. In light of Union Budget 2020, which will be presented by Finance Minister Nirmala Sitharaman on 1st Feb, let us understand a bit more about this concept.
But before we begin, it’s important to understand the means by which the government earns revenue and what are the expenditures it incurs.
Revenue receipts or Revenue for the government comes primarily through taxes – Income Tax, Corporate Tax, GST, Excise and customs duties.
There are certain non-tax revenue sources as well like dividends, disinvestment receipts and interest income.
This is the total of all the government spends in the form of revenue payments, capital expenditure and interest payments.
Thus, Fiscal Deficit = Government’s Expenditure – Government’s Income . Conversely, the opposite of fiscal deficit is fiscal surplus – If the difference between government’s total expenditure and revenue receipts is positive, it is referred to as Fiscal surplus. The Fiscal Deficit is represented as a percentage of the Gross Domestic Product (GDP). The current Fiscal Deficit target has been kept at 3.3 percent of the country’s GDP.
In this article
What Leads To A Fiscal Deficit?
Fiscal Deficit is a direct result of a) Revenue Shortfall and b) A marked increase in government’s spending or expenditure.
Sometimes, the government has to spend extra for the benefit and upliftment of a particular section of the society, thus exceeding its expenditure projections.In fact, a slightly higher deficit is thought to be positive if the government is spending on creating infrastructure, employment generation and in other areas benefiting economic development. Generally though, Fiscal Deficit below 4 percent of the GDP is considered to be good.
Ideal Fiscal Deficit
For a developing country like India, fiscal deficit in the range of 3 – 4 per cent is not considered to be bad. The government has been trying to be fiscally prudent for the last couple of years and has been more keen in keeping it closer to 3 percent of GDP. The Corporate tax rate cut announced last year, though, is expected to present a challenge to the Finance Minister in the upcoming budget for rationalizing as well as making good this loss in revenue and its impact on Fiscal Deficit. (The expected loss to the government’s revenue kitty resulting from Corporate tax rate cut is INR 1.45 Lakh crores)
The economic slowdown has also resulted in lower than expected GST collections. The upcoming budget would be keenly watched out for measures regarding higher tax collections and will shed some light on the government’s Fiscal policy.
How Does The Government Manage Fiscal Deficit?
The government manages its deficit by borrowing from various sources like the Reserve Bank of India, public sector banks, large public institutions, overseas markets, capital markets and it can raise funds from the public as well.
Budget 2020 And Fiscal Deficit Targets
A slowing economy, issues on the micro and macro fronts, low production & consumption, declining demand and higher inflation – these are some of the challenges before the Finance Minister when she presents the Budget on February 1, 2020.
The expected loss in revenue by way of Corporate tax rate cut and lower than expected GST collections have further added to the burden.
The Disinvestment targets for the year have still not been met and a lot depends upon the disinvestment of Bharat Petroleum Corporation Limited. Air India disinvestment plan is expected to fructify only in next financial year.
It would be interesting to note the commentary of the Finance Minister on Saturday, though she is expected to adopt a flexible approach in meeting the fiscal target.