Fiscal Deficit – Explained in Easy Language

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Fiscal Deficit

FISCAL DEFICIT

· The gap between the receipts and expenditure is called deficit.
· Fiscal deficit is the difference between total expenditure and total receipts except borrowing and other liabilities
· Fiscal deficit = Total expenditure – Total receipts except borrowing and other liabilities.
Fiscal deficit = Total expenditure – (Capital receipts other than borrowings and other liabilities + revenue receipts)
Fiscal deficit = Budget deficit + (Borrowing from RBI + Public borrowing and other liabilities)
· To be precise about fiscal deficit it is the amount of Borrowing and other liabilities.
· The fiscal deficit can be financed by borrowing from the Reserve Bank of India (which is also called deficit financing or money creation) and market borrowing (from the money market, which is mainly from banks). But uncontrolled borrowing is not good for the economy, as a greater portion of the governments revenue will in future be used to pay back the interest of loans and the money available for social sector initiatives will reduce. Besides the fiscal deficits accumulate over years resulting in a big debts and debt traps.
· Fiscal deficit is widely used a summary indicator for macroeconomic effect of the budget in many industrialized countries. The IMF uses this measure as a principal policy target in its programmes. India began the reporting of its fiscal deficit only after 1991.

Fiscal responsibility and budgetary management act-2003

· The Government notified FRBM rules in July 2004 to specify the annual reduction targets for fiscal indicators.
· The FRBM rule specifies reduction of fiscal deficit to 3% of the GDP by 2008-09 with annual reduction target of 0.3% of GDP per year by the Central government. Similarly, revenue deficit has to be reduced by 0.5% of the GDP per year with complete elimination to be achieved by 2008-09.
· It is the responsibility of the government to adhere to these targets. The Finance Minister has to explain the reasons and suggest corrective actions to be taken, in case of breach.
· Further, the Act prohibits borrowing by the government from the Reserve Bank of India, thereby, making monetary policy independent of fiscal policy.
· As per the amendments in 2012, the Central Government has to take appropriate measures to reduce the fiscal deficit, revenue deficit and effective revenue deficit to eliminate the effective revenue deficit by the 31st March, 2015
· Vide the Finance Act 2015, the target dates for achieving the prescribed rates of effective deficit and fiscal deficit were further extended. The effective revenue deficit which had to be eliminated by March 2015 will now need to be eliminated only after 3 years i.e., by March 2018. The 3% target of fiscal deficit to be achieved by 2016-17 has now been shifted by one more year to the end of 2017-18.

14th Finance commission recommendations

· The 14th Finance Commission recommended the Centre to maintain its fiscal deficit at 3.6 per cent of the country’s gross domestic product for 2015-16 from 4.1 per cent projected for the current financial year and then maintain it at three per cent for the following four years.
· The recommendations are in line with a fiscal road map, laid by Finance Minister Arun Jaitley’s predecessor P Chidambaram, though the existing time-frame ends at 2016-17. The Commission’s recommendations extended it to 2019-20.

Union budget 2016-17 and Fiscal deficit

· As per the budget, the government has met its 2016 fiscal deficit target of 3.9 percent of GDP and has retained next year’s target of 3.5 percent, which is in line with the fiscal consolidation roadmap earlier set.
· It was proposed to constitute a Committee to review the implementation of the FRBM Act and The committee would examine whether the government can have a fiscal deficit range as the target, instead of the current practice of the fixed numbers as targets.

Useful Links

BUY NOTES ON TYPES OF FINANCIAL INSTRUMENTS ONLY FOR RS 10 

BUY NOTES ON ECONOMIC SURVEY ONLY FOR RS 25

BUY NOTES ON TAXATION IN INDIA ONLY FOR RS 25

 

 

  • Sunil IH

    Why has Mockbank stopped the daily Quiz section ? It was very helpful for us. Please bring it back ..

    • AMIT CHAUDHARY

      Sunil
      Are you referring Daily Current affairs Quiz?

      • Sunil IH

        Yes i used to refer it regularly. It used to keep us updated. Why have you stopped it ? Please bring it back 🙁

        • AMIT CHAUDHARY

          Point Noted Sunil.
          We will bring it back soon