What is Fiscal Deficit?
Historical Background
Key Points
9 points- 1.
Calculated as: Total Expenditure - Total Revenue (excluding borrowings).
- 2.
Expressed as a percentage of GDP for international comparison and to assess its sustainability relative to the economy's size.
- 3.
The FRBM Act initially mandated a fiscal deficit target of 3% of GDP.
- 4.
High fiscal deficit can lead to increased government borrowing, higher interest rates, crowding out of private investment, and inflationary pressures.
- 5.
Financed through market borrowings (issuing government bonds), external borrowings, and sometimes through Ways and Means Advances from the RBI.
- 6.
Revenue deficit (difference between revenue expenditure and revenue receipts) is a component, indicating borrowing for consumption.
- 7.
Primary deficit = Fiscal deficit - Interest payments (shows borrowing for current year's expenses excluding past debt servicing).
- 8.
A lower fiscal deficit generally signals fiscal prudence, improves a country's credit rating, and enhances investor confidence.
- 9.
Indicates the extent of the government's borrowing requirement for the financial year.
Recent Developments
5 developmentsFRBM targets were relaxed during the COVID-19 pandemic (2020-2022) due to increased spending and revenue shortfalls.
The Union Budget 2024-25 (interim) projected a fiscal deficit of 5.8% for FY24 and aims to reduce it to 5.1% for FY25, with a target of 4.5% by FY27.
Increased focus on the quality of fiscal deficit, emphasizing capital expenditure over revenue expenditure to boost long-term growth.
The N.K. Singh Committee reviewed the FRBM Act and suggested a debt-to-GDP ratio target for fiscal consolidation.
State governments are also given flexibility in their fiscal consolidation roadmaps, often linked to central government grants.
This Concept in News
2 topicsIndia's Oil Import Dependence Projected to Peak in FY26
25 Feb 2026The news highlights the vulnerability of India's economy to external factors, specifically the rising cost of oil imports. This directly impacts the fiscal deficit because the government may need to spend more on subsidies to cushion the impact of high oil prices on consumers, or it may face lower tax revenues if economic activity slows down due to higher energy costs. This situation challenges the government's fiscal consolidation efforts and underscores the importance of diversifying energy sources and promoting energy efficiency. Understanding the fiscal deficit is crucial for analyzing this news because it helps assess the potential impact of rising oil import costs on the government's budget and its ability to meet its fiscal targets. It also highlights the need for a comprehensive energy policy that addresses both energy security and fiscal sustainability.
Rising Government Borrowings: Understanding the Economic Implications and Fiscal Challenges
9 Feb 2026The news about rising government borrowings directly highlights the issue of the fiscal deficit. It demonstrates how a high fiscal deficit can lead to increased borrowing costs, making it more difficult for the government to manage its finances. This news applies the concept of the fiscal deficit in practice, showing how it impacts the real economy. It reveals the challenges faced by governments in balancing the need for spending with the need for fiscal discipline. The implications of this news are that the government may need to cut back on spending or find new sources of revenue to reduce the fiscal deficit. Understanding the fiscal deficit is crucial for analyzing this news because it helps to understand the underlying economic forces at play and the potential consequences of government policies. Without this understanding, it's difficult to assess the long-term sustainability of government finances and the impact on the economy.