Recently, the Centre’s fiscal deficit in the first four months of 2023-24 touched 33.9% of the full-year target.In the Union Budget, the government projected to bring down the fiscal deficit to 5.9% of the gross domestic product (GDP) in the current FY.The deficit was 6.4% of the GDP in 2022-23 against the earlier estimate of 6.71%.
Fiscal Deficit
- Fiscal deficit is the difference between the government’s total expenditure and its total revenue (excluding borrowings).
- It is an indicator of the extent to which the government must borrow in order to finance its operations and is expressed as a percentage of the country’s GDP.
High and Low FD
- A high fiscal deficit can lead to inflation, devaluation of the currency and an increase in the debt burden.
- While a lower fiscal deficit is seen as a positive sign of fiscal discipline and a healthy economy.
Positive Aspects of Fiscal Deficit
- Increased Government Spending: Fiscal deficit enables the government to increase spending on public services, infrastructure, and other important areas that can stimulate economic growth.
- Finances Public Investments: The government can finance long-term investments, such as infrastructure projects, through fiscal deficit.
- Job Creation: Increased government spending can lead to job creation, which can help reduce unemployment and increase the standard of living.
Negative Aspects of Fiscal Deficit
- Increased Debt Burden: A persistent high fiscal deficit leads to an increase in government debt, which puts pressure on future generations to repay the debt.
- Inflationary Pressure: Large fiscal deficits can lead to an increase in money supply and higher inflation, which reduces the purchasing power of the general public.
- Crowding out of Private Investment: The government may have to borrow heavily to finance the fiscal deficit, which can lead to a rise in interest rates, and make it difficult for the private sector to access credit, thus crowding out private investment.
- Balance of Payments Problems: If a country is running large fiscal deficits, it may have to borrow from foreign sources, which can lead to a decrease in foreign exchange reserves and put pressure on the balance of payments.