The Explainer: What is Fiscal Deficit?
The first two parts of Understanding the Budget evoked good response.
This post will dwell on the idea of Fiscal Deficit, a factor which is giving the Finance Minister of India the jitters.
What is Fiscal Deficit?
Fiscal Deficit is defined as the difference between the government's total expenditure and the total non-debt creating receipts.
What types of receipts are non-debt creating?
Revenue Receipts, Recoveries of Loans, and Other Receipts are
all non-debt creating. This means that the government does not have to borrow
to generate these sources of income.
Now, look at the accompanying table: Fiscal Deficit is numbered 22, Revenue Receipts is 1, Recoveries of Loans is 5
and Other Receipts is numbered 6.
Hence,
(22) Fiscal Deficit = (16) Total Expenditure – (1) Revenue
receipts + (5) Recoveries of loans + (6) Other Receipts)
Revenue Receipts
would include both tax and non-tax revenue of the Government of India (GoI).
What is tax revenue?
This refers to revenue that the GoI gets by way of collecting taxes, like
Personal Income Tax, Corporate Tax (charged on incomes of companies), Central
Sales Tax and Service Tax.
What is Non-tax
revenue?
This would include Stamp Duty and Dividends earned from Public
Sector Units (PSUs). Dividend is the return on capital invested by the
government in PSUs.
Sometimes the government of India receives money that it
would have lent to some country/organisation in the past. When such money is
received, it is recorded under the ‘Recoveries of Loans’ head.
When does
Fiscal Deficit arise?
Fiscal Deficit arises when the government has expenditure
higher than the revenue it generates. To bridge this expenditure-revenue deficit,
the government resorts to borrowing. This borrowing is called Fiscal Deficit.
In short, fiscal Deficit is the total borrowing of the
government of India to fund the allocations and expenditures listed in the Union
Budget.
In the accompanying table, the Revised Estimates for 2012-13
show a Fiscal Deficit of Rs5,20,925 crore. In other words, what this figure
means is that the Government of India is borrowing this huge amount of money in
2012-13! Yes, you got it right: a total borrowing of mind-numbing Rs5.2 lakh
crore in one year!
Fiscal Deficit is usually expressed in terms of percentage of the country’s Gross Domestic Product (GDP).
Now, go to the bottom of the table. It is mentioned that
India’s GDP in 2012-13 will be Rs10028118 crore; yes, you read it right: Rs100
lakh crore!
Taking India’s GDP to be Rs10028118 crore in 2012-13, the
Fiscal Deficit of Rs5.2 lakh crore works out to 5.2% of GDP.
So, to say that we are living way beyond our means would be
an understatement. While Fiscal Deficit is bad, one that is high could spell
doom for the economic growth of the country. The next post will focus on the
adverse consequences of Fiscal Deficit.
