Fiscal deficitDate: 16 January 2020 Tags: Basics of Economics
Former Economic Affairs Secretary S C Garg has stated, in his blog dated January 14, that the true fiscal deficit for 2018-19 is 4.7%, more than a full percentage point than the number claimed by Finance Minister Nirmala Sitharam’s Budget in July.
India’s fiscal deficit, which essentially maps how much money the Indian government has to borrow to make up the gap between its expenditure and its revenues, was just 3.4 per cent of the gross domestic product (GDP) for 2018-19.
For the current year, the Union Budget presented in July expected the fiscal deficit to be 3.3 per cent of the GDP.
It has been suspected that the official figures hide the true fiscal deficit. That’s because some of the government’s expenditure was funded by the so-called “off-budget” items.
As a result, while this extra expenditure did not figure in the official calculations, it did mean that the true fiscal deficit or borrowing by the public sector was higher than the level presented in the Budget.
Fiscal Deficit is the difference between the Revenue Receipts plus Non-debt Capital Receipts (NDCR) and the total expenditure.
In other words, fiscal deficit is reflective of the total borrowing requirements of Government.
In the economy, there is a limited pool of investible savings. These savings are used by financial institutions like banks to lend to private businesses and the governments.
If this ratio is too high, it implies that there is a lesser amount of money left in the market for private entrepreneurs and businesses to borrow. Lesser amount of this money, in turn, leads to higher rates of interest charged on such lending.
A high fiscal deficit and higher interest rates at a time like this would also mean that the efforts of the Reserve Bank of India to reduce interest rates are undone.
There is no set universal level of fiscal deficit that is considered good. Typically, for a developing economy, where private enterprises may be weak and governments may be in a better state to invest, fiscal deficit could be higher than in a developed economy.
In developing economies, governments also have to invest in both social and physical infrastructure upfront without having adequate avenues for raising revenues.
In India, the Fiscal Responsibility and Budget Management Act requires the central government to reduced its fiscal deficit to 3 per cent of GDP. India has been struggling to achieve this mark.