Fiscal deficit is one of the widely used terms when the Budget or the Economy is discussed. It can be defined as the difference between the total revenue and total expenditure of the government. This excludes the borrowings from the government and indicates the ones required by them.
A government is said to run a fiscal deficit when the expenditure exceeds the revenue that it generates. In most cases, the government can make through the gap through external borrowings. And, it may not always be bad, but in certain circumstances, economists recommend running a larger fiscal deficit in order to spur economic spending when the economy is facing a slow down or at the time of recession. Due to this, there is a boost in demand and that can help lift the economic momentum.
Although there might be benefits, there are also downsides to managing such a large fiscal deficit. If the government borrows large sums from the market, the cost of borrowing surges for both the common man and the government.
In the key highlights of the Economic Survey tabled by Finance Minister Nirmala Sitharamal, the general fiscal deficit seen at 5.8 percent in FY19 against 6.4 percent in FY18
The equation means that if one adds borrowings to the total receipts in the equation, then the fiscal deficit would be a zero. The degree of fiscal deficit shows how far the government is spending beyond its means.
A deficit occurs due to a revenue deficit, which is a major hike in capital expenditure. It is financed through borrowing via the RBA or by raising money from capital markets through different instruments as treasury bills and bonds.
First, a debt trap occurs which means that in order to finance the fiscal deficit, the government has to borrow which creates an issue of repayment of loans and payment of interest. If the borrowing by the government rises, the liability in the future to repay loans amount with interest also increases.
Secondly, a wasteful expenditure can take place wherein due to the high fiscal deficit, there is unnecessary expenditure by the government that could also lead to inflationary pressure on the economy.
Thirdly, there could be inflationary pressure, wherein the government borrows from the Reserve Bank of India, and the central banks have to meet the demand by printing more currency notes, which causes an increase in circulation of more money which could thus result in inflationary pressure in the economy.
As for India, which is a developing economy, maintaining a fiscal deficit can be justified as the government needs to spend more infrastructure development.