Fiscal Deficit: Latest Update

The Centre’s fiscal deficit remained well within control at ₹ 3,78,563 crore or 68.1 per cent of the Budget Estimate in the first half of 2015-16 on the back of a strong growth in revenue collections.

The revenue deficit amounted to ₹ 2,69,008 crore or 68.2 per cent of the Budget estimate by September 30, according to data released by the Controller General of Accounts on Friday.

Capital spending, which is a key focus area of the Government this fiscal as it tries to boost economic growth, was also robust in the first half of the fiscal. Capital spending from Plan Expenditure shot up to ₹ 82,818 crore or 61.2 per cent of the full year target.

rbiUnderstanding the Fiscal Deficit

Fiscal deficit is the difference between the government’s expenditures and its revenues (excluding the money it’s borrowed). A country’s fiscal deficit is usually communicated as a percentage of its gross domestic product (GDP).

Government spending, inflation and lower revenue are among some of the main factors that point to fiscal deficit.

The cynical nature of fiscal deficit does not only jeopardize the growth of the country but also the government’s economic management abilities.

In an ideal financial system, which has a balanced fiscal deficit, the cost of expenditure is low while production and growth is advancing. But when there is an increase in fiscal deficit it means that the government is spending too much while it is earning less. Hence, it is important that the government keeps its expenses under control.

One way the government earns money, is through taxes. For example, if the government lowered taxes or provided tax concessions to a particular group of people, then it would earn less, leading to an increase in fiscal deficit. And that’s one of the reasons why you will find the government giving a face-lift to the tax structures. In the same context, cutting of custom duty and excise duty will lead to declining revenues.

Like India, many developing countries are making an effort to resolve big fiscal deficits. On the bright side, for India, among other sources of revenue, foreign investments and inflow of remittance s from Indians living overseas has helped avoid very high deficits.

Fiscal deficit does not come about only in case of creating less revenue and spending more money. Another major reason for a growing fiscal deficit can be slow economic growth or sluggish economic activities.