India’s Fiscal Deficit

• 02 Sep 2023

For Prelims: Fiscal Deficit, Union Budget, Gross Domestic Product (GDP), Inflation, Devaluation of the currency, Balance of Payments.

For Mains: Impact of Fiscal Deficit on Indian Economy.

Source: TH

Why in News?

• 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%.

What is Fiscal Deficit?

• About:
  • 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.

UPSC Civil Services Examination, Previous Year Question (PYQ)

Mains:

Q. Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (2019)