Accounting Training

Blog

Blog Archive


2016

Economy Updates - Feb-2016

Fiscal Deficit

What is Fiscal deficit?

  • Fiscal deficit is essentially the difference between what the government spends and what it earns.
  • It is expressed as a percentage of GDP
    Fiscal Deficit = Total Government Expenditure – Total Government Revenue

Reasons for Fiscal Deficit

  • Government spending, inflation and lower revenue are among some of the main factors that point to fiscal deficit.

Sources of Financial Fiscal Deficit

Sources of Financial Fiscal Deficit

Negatives of Fiscal deficit

  1. Debt Trap : In order to fund its expenses, Government needs money. Fiscal deficit indicates the total borrowing requirements of the government. Borrowings not only involve repayment of principal amount, but also require payment of interest. Interest payments increase the revenue expenditure, which leads to revenue deficit. It creates a vicious circle of fiscal deficit and revenue deficit, wherein government takes more loans to repay the earlier loans. As a result, country is caught in a debt trap.
  2. Inflation : Government mainly borrows from Reserve Bank of India (RBI) to meet its fiscal deficit. RBI prints new currency to meet the deficit requirements. It increases the money supply in the economy and creates inflationary pressure.
  3. Foreign Dependence : Government also borrows from the various countries and various world organizations such as IMF, which raises its dependence on other countries.

Is Fiscal deficit really bad?

  • Economists differ widely on their views on fiscal deficit. As per one school of thought, a deficit prevents an economy from falling into recession, while another school of thought is that a country should not have fiscal deficit.
  • Fiscal deficit usually occurs on account of revenue deficit or a major hike in capital expenditure. Capital expenditure is incurred to create long-term assets such as factories, buildings and other developments. Fiscal deficit does not necessarily mean a bad issue for the economy, if the money that Government has borrowed is used to increase the production which in turn contains any inflationary pressure.

Conclusion

  • Fiscal deficit is the area where the RBI Governor and the Finance Minister is generally found at the loggerheads. It is the role of the Central Banker to frame monetary policy keeping inflation in check. At the same time, Finance Minister, aims to achieve higher GDP growth by way of increasing Government spending. Higher spending leads to higher growth but that comes at the cost of inflation. All things are interrelated and that’s why the Governor and Finance Minister should work in tandem to achieve sustainable economic development.

 

Financial Management