WHAT IS IT?
Simply put, fiscal deficit is the excess of government expenditure over government income in a year. The government gets its revenues from taxes and dividends from its holdings in state-owned companies, among other things. It also has to spend on providing public goods, such as roads, and services such as healthcare and education, and these days on awards to World Cup winning cricketers. When the expenditure exceeds income, the shortfall is known as fiscal deficit.
This number is typically expressed as a portion of gross domestic product, or GDP, (the sum of goods and services produced in the country in a year). For the current fiscal year, the government has projected fiscal deficit at 4.6% of the GDP.
IS IT THE SAME AS GOVERNMENT DEBT?
The total government debt can be viewed as an accumulation of deficits. You can see it as an accumulation of loans taken to finance past shortfalls. India’s debt is around 60% of its GDP.
IS PRIMARY DEFICIT SAME AS FISCAL DEFICIT?
No. Primary deficit means the excess of current expenses over current revenues. Simply put, if your monthly payments on groceries, rent and commuting exceed your salary, it would be comparable to a primary deficit. Add to it interest payments you take on loans and you get the fiscal deficit.
HOW DOES GOVERNMENT FUND THE DEFICIT?
The same way you would if your monthly expenses exceed your monthly salary—by borrowing or selling some assets. Governments borrow money by issuing debt or bonds. This fiscal year, the government is planning to borrow Rs 4.17 trillion. Another way the government bridges the deficit is through disinvestment, which essentially is selling part of their stake in state-owned companies. They also get money from selling natural or national resources, such as telecom spectrum.
They have two other tricks up their sleeve that you or I don’t have. One is increase taxes, and the second printing money.
HOW IT AFFECTS YOU
A higher fiscal deficit could mean higher inflation or price rises. If the government prints money to finance the deficit, it will increase the money supply in the economy. In other words, more money chases the same amount of goods, leading to inflation.
If the government doesn’t print money and borrows from the market instead, that would lead to an increase in interest rates. Therefore, the private sector may find it difficult to borrow money or have to pay higher rates for loans, which can hurt growth.