India’s Fiscal Deficit | 02 Sep 2023
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?
- 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)
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)