Fiscal Deficit: History, Definition and Impact on the Economy

Government budget deficit :

Budget deficit refers to a situation in which the budget expenditure of the government exceeds the budget receipts of the government. In other words, the budget deficit is based on the total receipts of the total expenditure of the government. There are mainly the following three types of budget deficit related to the budget of the Government of India-

Fiscal deficit
Revenue loss
Primary deficit

What is fiscal deficit?

It is the difference between the total expenditure of the government and the total earnings excluding borrowings. In other words, fiscal deficit tells how much money the government needs to meet its expenditure. Higher fiscal deficit means that the government will need to borrow more. Fiscal deficit simply means how much borrowing will be required by the government to meet its expenditure. There are many measures that can be taken to reduce the fiscal deficit. These include reduction of public expenditure in the form of subsidy, reduction of bonus, LTC, leave encashment etc. In other words,

The difference between the total income and expenditure of the government is called fiscal deficit. This shows how much borrowing will be required by the government to run its business. Borrowings are not included in the calculation of total revenue. Fiscal deficit is usually due to decrease in revenue or excessive increase in capital expenditure.
Capital expenditure is incurred on long-term assets such as factories, construction of buildings and other development works. The fiscal deficit is usually met by borrowing from the central bank (Reserve Bank) or by raising funds from the capital market through short- and long-term bonds.

History of Fiscal Deficit:

Talking about three decades ago, very few people in the country would have heard the name of fiscal deficit. The term was officially used for the first time in the Economic Survey of 1989-90. After the economic crisis of 1991, the process of stabilization and it became more and more discussed among the programs of the International Monetary Fund (IMF).

Certainly our government did not take it seriously at that time but today the time has changed and today reducing the fiscal deficit is a major goal of the government's economic policies. Therefore, reviewing the scope of fiscal deficit in the country during the last 35 years can prove to be very informative.

Definition of fiscal deficit:

Fiscal deficit is related to both revenue and capital expenditure of the government and capital receipts excluding revenue and borrowing. In other words, fiscal deficit is the difference between total expenditure (revenue expenditure + capital expenditure) and total receipts excluding borrowings , Fiscal Deficit = Total Expenditure (Revenue Expenditure + Capital Expenditure) - Total Receipts excluding Borrowing or Revenue Deficit + Capital Expenditure - Capital Receipts or Borrowings/Loans Excluding Fiscal Deficit Fiscal Deficit is estimated to be borrowings required by the Government to be higher of Fiscal Deficit The symbol is that the government will have to take a loan.

Effects of Fiscal Deficit on the Economy

Fiscal deficit means increase in borrowings/loans taken by the government. The following are the effects of this rising debt.

Inflationary trap – The money supply increases due to the debt taken by the government. An increase in the money supply causes an increase in the price level. A rise in the price level induces investment in the hope of higher profits, but when the price level starts rising to fearful limits, investment declines, creating an inflationary trap. In such a situation, the fiscal deficit as a percentage of GDP remains for a long period of time and there is long-term economic instability.
Burden on the future generation - As a result of fiscal deficit, the future generation inherits a backward economy, in which the growth rate of GDP remains low, because a large part of GDP goes to the payment of debts.
Decreased Government Credibility – Due to high fiscal deficit, the credibility of the government in the domestic and international money market decreases, due to which the credit rating of the economy starts falling. Foreign investors stop investing in the economy and imports become expensive. This also increases the deficit of the balance of payments, due to which the government can take more loans or open its economy for foreign direct investment. This gives rise to a vicious cycle of debt.
Debt trap/debt trap – Consistently high fiscal deficit as an increasing percentage of GDP leads to a situation where-
The growth rate of GDP is low due to high fiscal deficit.
Fiscal deficit would be high due to low Gross Domestic Product prosperity, in such situations, a large part of government expenditure is not spent on investment expenditure, but on payment of loans and payment of interest.

What is the revenue deficit?

Revenue deficit occurs when the total expenditure of the government exceeds its estimated income. The difference between the revenue expenditure and revenue receipts of the government is called revenue deficit. The point to be kept in mind here is that expenditure and income are only in the context of revenue. Revenue deficit or revenue deficit shows that the government does not have enough revenue to run the government departments in a normal manner. In other words, when the government starts spending more than it earns, the result is a revenue deficit.

Revenue deficit is not considered good. To meet this gap between expenditure and earnings, the government has to borrow or it adopts the route of disinvestment. In the case of revenue deficit, often the government tries to reduce its expenditure or it increases the tax. To increase the income, it can also introduce new taxes or increase the tax burden on the high earners.

Difference between revenue deficit and fiscal deficit

When revenue expenditure exceeds revenue receipts, it is called revenue deficit. In the form of formula, revenue deficit = revenue expenditure - revenue receipts
On the other hand, when the total expenditure is more than the total receipts under the budget, then this difference is called fiscal deficit. Receipts + Capital receipts created from non-debt) = (Revenue expenditure - Revenue receipts) + (Capital expenditure - Capital receipts created from non-debt)

What is primary deficit?

The primary deficit is obtained by deducting the interest on previous borrowings from the fiscal deficit of the current financial year. Where fiscal deficit includes the total borrowing of the government including interest payments. At the same time, the payment of interest is not included in the primary deficit. Primary deficit means how much borrowing is required by the government to meet the expenses after excluding the payment of interest.

Zero primary deficit indicates the need for borrowing to pay interest. Higher primary deficit indicates the need for fresh borrowing in the current financial year. Since this is already the amount over and above the borrowing. Therefore, the same measures have to be taken to reduce it, which are applicable in the case of fiscal deficit.

Budget Estimates for 2020-21 vis--vis Revised Estimates of 2019-2020:

Total expenditure: The expenditure by the government in 2020-21 is estimated at Rs 30,42,230 crore. This is 12.7% higher than the revised estimates of 2019-20. Out of the total expenditure, revenue expenditure is estimated at Rs.26,30,145 crore (an increase of 11.9%) and capital expenditure is estimated at Rs.4,12,085 crore (an increase of 18.1%).
Total Receipts: The receipts of the Government are estimated at Rs 22,45,893 crore (excluding borrowings), which is a growth of 16.3% over the Revised Estimates of 2019-20. This gap in receipts and expenditure will be bridged through borrowings which are estimated at Rs 7,96,337 crore. This is an increase of 3.8% as compared to the Revised Estimates of 2019-20.
Transfer to States: Rs 13,90,666 crore will be transferred by the Central Government to the States and Union Territories in 2020-21. This is 17.1% higher than the Revised Estimates of 2019-20 and will include (i) Rs 7,84,181 crore devolution from central taxes to states, and (ii) Rs 6,06,485 crore in grants and loans.
Deficit: Revenue deficit is targeted at 2.7% of GDP and fiscal deficit at 3.5% in 2020-21. The primary deficit (which is the fiscal deficit excluding interest payments) is targeted at 0.4% of GDP.
Estimated GDP Growth: In 2020-21, the nominal GDP is projected to grow at the rate of 10%. The nominal GDP growth rate in 2019-20 was 12%.

Note: The budgetary allocations announced at the beginning of each financial year are called budgeted estimates. The estimated amount of receipts and expenditure at the end of the financial year is called Revised Estimate.

India's performance so far on the fiscal deficit front

The composite deficit, according to statistics, rose from 6 per cent of GDP in the early 1980s to 8 per cent by the middle of the decade and 8-9 per cent by 1990-91. Fiscal imbalance increased. The central government is often considered primarily responsible for the 1991 balance of payments crisis. It is believed that the loose fiscal policy of the previous years was responsible for the said crisis.
It is to be noted that this crisis prompted the central government to initiate fiscal inclusion and was successful in reducing the compound deficit from the level of more than 9 per cent in 1990-91 to 6 per cent in 1996-97. But this situation did not last very long. In the five years after 1996-97, the combined fiscal deficit again reached a level of 9.6 per cent.
In the next five years from 2002-03 onwards, there was a sharp decline and it came down from 9.3 per cent to 4.7 per cent. During this, positive efforts were being made both at the state and central levels. Parliament had passed the Fiscal Responsibility and Budget Management Act in 2003 and its notification was also issued in 2004.
Debt relief was linked to the states in 2004 after the recommendation of the 12th Finance Commission, almost all the states did the same. The sales tax of the states was converted into a state value added tax and the service tax net of the center was also substantially expanded. With the fiscal deficit narrowing, the interest rate came down. This boosted investment and growth. This affected the revenue and the deficit further reduced further.