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Updated July 5th, 2019 at 23:00 IST

Union Budget 2019 | Fiscal Deficit and Current Account Deficit: What's the difference?

When we talk about the Union Budget, a term that is absolutely fundamental to maintaining the all-important balance is 'Fiscal Deficit'

Reported by: Shloak Prabhu
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When we talk about the Union Budget, a term that is absolutely fundamental to maintaining the all-important balance is 'Fiscal Deficit'. Fiscal Deficit is a macroeconomic term that speaks volumes about a country's economic and more importantly, financial discipline.

Fiscal deficit, put simply, is the difference between the total revenue earned and the total expenditure. However, the borrowings by the government are not considered in the fiscal deficit, instead fiscal deficit ultimately indicates the borrowings the government will require. 

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In this case, if borrowings are added to the total receipts, then it would mean that the fiscal deficit is zero. In addition, the Fiscal Deficit in the economic terms also throws light on the amount of money that the government is spending over and above what it's earning. 

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Fiscal Deficit and its effects:

Debt Trap:

In order to fill the void of the fiscal deficit, the government resorts to borrowing which further stirs up the issues of repayment of loans which come with the interest. If the government borrows more, at some point of time in the future it becomes liable to repay loans which have an increased interest rate. Additionally, payment of interest raises the revenue expenditure which leads to a higher revenue deficit. hence, the possibility of a cycle of borrowing to pay for loan interest emerges which will ultimately lead to a debt-ridden economy. 

Wasteful expenditure:

A higher fiscal deficit usually means wasteful and unnecessary expenditure by the government. Inflationary pressure on the economy may also come in. 

Inflationary pressure:

When the government is forced to borrow from the RBI, the central banks are expected to meet the demand by printing more currency notes, which causes increases the circulation of more money. The end result is inflation. 

Partial use:

The borrowings from the RBI by the government used to cover the fiscal deficit does not end up being used for expenditure as just the primary deficit i.e fiscal deficit-interest payment is available for financing expenditure. Only primary deficit i.e. fiscal deficit minus the interest payment is available for spending. 

The financial year of 2018-19 saw a fiscal deficit of 5.8 percent as per the economic survey which was tabled by the Finance Minister Nirmala Sitharaman in the Rajya Sabha on Thursday. 

Fiscal deficit isn't the only major 'deficit' that is spoken about in economic terms. There is also the Current Account 

Current Account Deficit (CAD): A definition

The current account deficit is a term that is closely associated with trade. It means that a country's import trade surpasses the export trade. The current account comprises of net income, such as interest and dividends, and transfers, such as foreign aid. Even so, these components make up only a small percentage of the total current account. Another element that is considered in the current account is the country's foreign transaction.

As per the Economic Survey, the CAD increased to 2.1 per cent of GDP in 2018-19, up from 1.8 per cent in 2017-18. The Economic Survey also indicated that the CAD is 'within manageable levels'. Earlier, the RBI said that India’s CAD widened to $57.2 billion, or 2.1% of GDP, in FY19 from 1.8% a year ago.

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Published July 5th, 2019 at 08:18 IST

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