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Current Affairs

Fiscal deficit

Date: 22 September 2019 Tags: Basics of Economics

Issue

NITI Ayog vice-chairman Rajiv Kumar has said that the ?1.45 lakh crore tax giveaway is unlikely to widen fiscal deficit as the shortfall will be met through increased tax collections due to higher growth.

 

Background

The government had announced tax cuts for corporates by 10-12% points, bringing down the effective corporate tax to 25.17% inclusive of all cess and surcharges for domestic companies.

 

Details

  • Budget had estimated fiscal deficit at 3.3% of the GDP for the current fiscal but many analysts say it will be overshooting by at least 70 bps to 4.1% as the quantum of the giveaways is worth 0.7% of the GDP.

  • It is said that India’s tax buoyancy has been very good. Therefore, both direct and in direct tax collections will go up with growth after the tax cuts. The higher revenue from tax and non-tax fronts will help the government finance the fiscal deficit.

 

Fiscal Deficit

  • The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings needed by the government.

  • A fiscal deficit occurs when a government's total expenditures exceed the revenue that it generates, excluding money from borrowings.

  • A deficit is usually financed through borrowing from either the central bank of the country or raising money from capital markets by issuing different instruments like treasury bills and bonds.

 

Impact of Fiscal deficit

 Budget deficits crowd out private borrowing, manipulate capital structures and interest rates, decrease net exports, and lead to either higher taxes, higher inflation or both.