Explained:About India’s fiscal deficit

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News:Recently,former Economic Affairs secretary has claimed that the actual fiscal deficit for the last financial year and the current one is more than a full percentage point higher than the official data.

Facts:

What is Fiscal Deficit?

  • Fiscal Deficit is the difference between the Revenue Receipts plus Non-debt Capital Receipts (NDCR) and the total expenditure.
  • In other words, fiscal deficit is reflective of the total borrowing requirements of Government.

Significance of fiscal deficit:

  • The significance of fiscal deficit is that if the deficit is too high,it implies that there is a lesser amount of money left in the market for private entrepreneurs and businesses to borrow. 
  • The lesser amount of this money will in turn leads to higher rates of interest charged on such lending.Hence,a higher fiscal deficit means higher borrowing by the government which in turn mean higher interest rates in the economy.
  • Currently,the high fiscal deficit and higher interest rates in India means that the efforts of the Reserve Bank of India to reduce interest rates are undone.

Acceptable level of fiscal deficit:

  • There is no set universal level of fiscal deficit that is considered good.In a developing economy,where private enterprises may be weak and governments may be in a better state to invest, fiscal deficit could be higher than in a developed economy.
  • In India,the Fiscal Responsibility and Budget Management(FRBM) Act requires the central government to reduce its fiscal deficit to 3 percent of GDP.
  • In Union Budget 2019,India has set a fiscal deficit target of 3.3% of the Gross domestic product(GDP) for 2019-20.

Controversy around fiscal deficit:

  • Former Economic affairs secretary has said that the true fiscal deficit for 2018-19 is 4.7% which is more than a full percentage point than the number claimed by Finance Minister in Budget 2019.
  • This is because the government has been financing the expenditure through off-budget financing which are are not recorded through the Consolidated Fund of India(CFI).