Fiscal Deficit

Fiscal Deficit

News: The Union Government’s Fiscal deficit during April-September widened to Rs. 7.02 lakh crore or 39.3% of the full year target of 17.87 lakh crore compared with Rs. 6.43 lakh crore in April-August.

What is Fiscal Deficit?
• It refers to the gap between the government's expenditure requirements and its receipts. It can also be put as the amount that the government needs to borrow to meet all its expenses.
• It is an indicator of how well the government is managing its finances.
• Fiscal Deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts)

Impact of Fiscal Deficit
• Level of the fiscal deficit determines the borrowing requirements of the government dependence on the borrowing from the rest of the world (e.g. IMF loan during 1991).
• Higher fiscal deficit also hampers future growth.
• Fiscal deficit has also direct relation with investor sentiments, it may also lead to crowding out effect.
• Fiscal deficit also results in higher government debt which may lead to a debt trap.

What are the measures to reduce Government Deficit?
• Improved Taxation: Emphasis on tax-based revenues should be increased with measures to expand tax base and appropriate measures should be taken to reduce tax evasion.
• Disinvestment: Disinvestment targets should be achieved with monetisation of government assets through National Monetisation Plan.
• Rationalisation of Subsidies: Subsidies in the economy should be rationalised in order to promote qualitative production in the economy.
• NK Singh Committee: Establishing an Independent Fiscal Council that can review the fiscal targets decided in the Budget.
• New Act for Budget Management: The targets outlined under the FRBM Act, 2003 have been postponed a number of times and there is a need for a new Act that is effective and transparent in deficit management.