Fiscal deficit explained: What it means for India’s economy

You might have heard the word 'Fiscal Deficit' numerous times, some time on business news channels, some time in speech of financer minister. Economists discuss it but what actually it is.

What is Fiscal Deficit?

Fiscal Deficit is a word to identify the additional spending by the government compared to earning. In other words, fiscal deficit indicates the difference between government's outgo and its receipt for a financial year.

How is it calculated?

The term fiscal deficit is computed as the difference between government's total expenditure and total receipts, excluding borrowings.

In receipts, revenue receipts and capital receipts are the terms.

The revenue receipts are the receipts from where the revenue is obtained. Such as Goods and Services Tax (GST). Also includes corporation tax, income tax and other taxes levied by central government. Dividends and profits of PSUs are included in non-tax revenues.

Recovery of loans and disinvestment proceeds fall under Capital Receipts.

Why Fiscal Deficit is significant?

Fiscal Deficit provides the impression of government spendings exceeding earnings. It provides the general impression of financial health of the government. Fiscal Deficit is directly related to financial health of the government in reverse directions. If the Fiscal Deficit is large, then the financial health is poor. It implies that the government is receiving less and paying more.

A moderate fiscal deficit enables the government to spend on infrastructure and social welfare, which can aid in growth and development without having to raise taxes in the short run.

Maintaining the fiscal deficit within target enables the government to enhance the confidence of investors. It assists the government in managing the inflation.

Target current

For 2025-26 financial year, the Indian government has set the fiscal deficit at 4.4% of GDP. For the 2024-25 financial year, it was 4.8%. Thus the government has intended to scale down their target of fiscal deficit. The target speaks of the continued fiscal consolidation which is sought to be achieved by balancing development expenditure with durable borrowing behavior.

Conclusion

Fiscal deficit is a core economic indicator that strikes a balance between public expenditure ambitious and financial sustainability. The government has planned to achieve 4.4% of GDP. The target does ensure the public investment without infringing on macroeconomic stability.