Fiscal Deficit

By Amigos IAS

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.

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