What is Fiscal Deficit?
Fiscal deficit in simple terms is the difference between the government’s total revenue and total expenditure and is an indication of the total borrowings required by the government. As a matter of practice, borrowings are not included while calculating revenue. A substantial revenue deficit or a major hike in the capital expenditure leads to fiscal deficit. The fiscal deficit of an economy is usually communicated as a percentage of its gross domestic product (GDP).
What causes fiscal deficit?
Few factors responsible for fiscal deficit are inflation, government spending and lower revenue. What is noteworthy is that fiscal deficit does not only affect the growth of a country but also shows government’s economic inefficiency. A balanced fiscal deficit shows an ideal state of governance and management. An increase in fiscal deficit shows that government is spending more than it’s earning and is usually an indicator of bad performance.
Adverse effects of high fiscal deficit
If the fiscal deficit goes high, it would show that the economy is in trouble and there is certainly lot many reasons to worry about. It could pose an inflation risk or minimize the growth of economy and government’s inability. On a macro level, it could also lead to low foreign investment which could again compromise the state of economy. A high fiscal deficit also impacts the overall savings and may lead to raised taxes to cover up for the extra amount being spent.
What could be done to control fiscal deficit?
One of the common measures taken by government to correct fiscal deficit is curbing import of gold, which will bring it down to substantial level. However, if the currency is falling at a steep rate, the economy might need to put a cap on its expenditures to avoid pressure on fiscal deficit. Moreover, government can also cut service taxes, excise duty and step up government expenditure to control the fiscal deficit. In context of Indian economy, the growing fiscal deficit has given rise to the balance of payments in previous few years and government has been taking sincere steps to correct the situation.
Last but not the least, government has been doing a lot to control its fiscal deficit in the past few years, however, Indian economy has been witnessing a soaring fiscal deficit and a lot needs to be done ahead. The money that government earns from taxes and non-taxes is certainly not enough to keep a check on fiscal deficit.