Basics Explanation Of Fiscal Deficit

Some experts said that the fiscal deficit is good for the country and country’s development. But some experts believe that it will be troubl...

Some experts said that the fiscal deficit is good for the country and country’s development. But some experts believe that it will be trouble for the country and its growth.

Here is some basic explanation of fiscal deficit, why it is happening? And what is the reason of fiscal deficit, weather it is good for the country or not?


Concept of Fiscal Deficit:


In a very simple word, fiscal deficit means the difference of government expenditure and government income or revenue.

Fiscal deficit is generally communicated as a percentage of gross domestic products (GDP).

For example: If the government revenue is Rs.200 and the expenditure of government is Rs.220 then it’s known as an over expenditure. And similarly, same is going for next year, and then each year over expenditure is known as a “FISCAL DEFICIT”

Fiscal deficit = Total Government Expense – Total Government Revenue

In government expenditure, there is include salaries payment of government staff, funds for various different scheme, loans, etc.are the expense which government does continuously.

In government income or revenue, include the interest of loans given, disinvestment, selling of oil, minerals etc.these all are Non-Debt Creating revenues means the government does not pay it back.

There is also some revenue which is debt-creating revenue like loans which is taken from the World Bank or from the abroad. It is a Debt-Creating income or revenue because the government must pay it back in a particular time period with a decided interest rate

Fiscal Deficit = Total Expenditure – Non Debt Creating Revenue

In another words, gross fiscal deficit is the excess of total expense include the loans which if given from the world bank and it is a non debt receipts.

Net Fiscal Deficit = Gross Fiscal Deficit - Net Lending

Fiscal deficit came into existence either due to revenue deficit or a major change in capital expenditure.

Capital expenditure means it is an expense for a purchase and development of assets like buildings, bridge, factories etc.

Capital expenditure is always for a long term.

In Indian economy is growing between the 5 to 5.5 % in the financial year ended in 2013, it means it is a challenge to the Indian economy and it is increased by 6.5 and 6.7% in financial year 2014 and in 2015 year respectively.

Types of Deficit:


1. Revenue deficit:

Revenue deficit means an excess of revenue expenses over revenue receipts, it simply understand that the government cannot pay its expenses from its current revenue or income.

Revenue deficit = revenue expenditure-revenue income

Revenue deficit includes and affect only current expenses of government.

2. Budget deficit:

Budget deficit include capital and the revenue items both. These types of deficit is financed by borrowing and taxation.

3. Primary deficit:

Primary deficit define as interest payment less from the fiscal deficit. Primary deficit is not including the burden of past debt. Therefore the reduction in the primary deficit shows that the government is following the fiscal gap during the year.

Net primary deficit = gross primary deficit-domestic lending

The Causes of Fiscal Deficit:

    Fiscal deficit means where the government expenses is high then the government revenue, so one of the reason of fiscal deficit is that the government is spending too much while it’s earning or revenue is less.

    So we can say that the government keep there expenses under control.

    Most earning of government is through the taxes, sometimes the government provided tax concessions to a particular group of people, and it decreases the revenue of government so it leads the fiscal deficit.

    Cutting of excise duty and custom duty is also one of the causes of fiscal deficit.

    Only less revenue or high expense is not only the reason behind the fiscal deficit, actually very slow economic growth is also one of the reason of fiscal deficit in India.

    Fiscal Deficit is bad for Country:


    Fiscal deficit puts economy in a trouble. It could impact on foreign investors from looking at India as one of the investment hubs. Fiscal deficit creates the inflation risk and also affected to the growth of the economy.

    If the financial deficit is there in a country means the expenditure is high then it could raise taxes to cover up for the spent extra money so ultimately consumers cut down their expenditure to pay the tax to the government.

    The government expenditure puts a pressure on interest rates and it’s crating a negative effect on savings and its disturbing the whole country or economy.

    Hence, fiscal deficit leads to a slow progress or growth of the nation or country.

    From the understanding of Fiscal Deficit, we can say that fiscal deficit is not good for the country. So Govt. keep their expenses in control. If fiscal deficit will continue for the next year also then Govt. must worry about it.

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