Why is it in the news?

• During the April-August period of fiscal year 2023-24, India’s fiscal deficit reached 36% of the Budget Estimate (BE), compared to 33% during the same period in the previous fiscal year.
• In absolute terms, the fiscal deficit amounted to ₹6.42-lakh crore by the end of August, according to data from the Controller General of Accounts (CGA).
• The government has set a fiscal deficit target of ₹17.87-lakh crore, which is equivalent to 5.9% of GDP, down from 6.4% in FY23.

About Fiscal Deficit

• Fiscal deficit represents the difference between government income and expenditure and indicates the total amount of borrowing required by the government.
• Expressed as a percentage of the country’s GDP, it indicates the extent to which the government must borrow to cover its expenses.
• High Fiscal Deficit can lead to inflation; may result in currency devaluation; and increases the government’s debt burden.
• Low Fiscal Deficit is a sign of fiscal discipline and a healthy economy.

Positive Aspects

• Allows the government to boost spending on public services and infrastructure, stimulating economic growth.
• Facilitates funding for long-term investments like infrastructure projects.
• Can lead to job creation, reducing unemployment and improving living standards.

Negative Aspects

• Persistent high fiscal deficits lead to growing government debt, placing a burden on future generations.
• Large fiscal deficits can increase the money supply, resulting in higher inflation and reduced purchasing power.
• Heavy government borrowing for deficit financing can raise interest rates, making it difficult for the private sector to access credit and crowding out private investment.
• Excessive fiscal deficits may necessitate borrowing from foreign sources, depleting foreign exchange reserves and impacting the balance of payments.