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Fiscal Deficit UPSC - Decoded

Fiscal Deficit UPSC

Fiscal deficit refers to the amount by which a government's spending exceeds its revenue in a given fiscal year, leading to increased borrowing and accumulation of debt. It represents the amount of borrowing required by the government to meet its spending obligations when its expenses surpass its income.

What is Management of Fiscal Deficit

Managing the fiscal deficit is a critical aspect of fiscal policy, and governments strive to strike a balance between promoting economic growth and maintaining fiscal discipline. The aim is to keep the deficit at a sustainable level while ensuring that public debt remains manageable, allowing the government to meet its financial obligations and maintain economic stability in the long term.

Calculating Fiscal Deficit

The calculation of fiscal deficit is simple-

Fiscal deficit = Government Income – Government Expenditure

This can be elaborated upon for a clearer comprehension as follows:

Fiscal Deficit = (Revenue Expenditure + Capital Expenditure) – (Revenue Receipts + Capital Receipts Excluding Borrowings)

After some rearrangement of the phrases, we have,

Fiscal Deficit = (Revenue Expenditure – Revenue Receipts) + Capital Expenditure – (Recoveries of loans + other Receipts).

What Causes Fiscal Deficit?

When a country's expenditures surpass its revenues, this is known as a fiscal deficit. There is a wide range of possible causes for this:

  1. Increased Government Spending: If tax revenues don't rise proportionately, a government's increased spending on programs and initiatives could increase the deficit.

  2. Lower Revenue: Declining tax revenues or natural resource income are two examples of revenue decreases that might lead to a worsening deficit.

  3. Economic Downturns: An increase in the deficit is possible if government revenues fall while expenditures rise during a recession.

  4. War or Natural Disasters: The government may need to boost spending to deal with the aftermath of a war or a natural disaster, adding to the deficit.

  5. Social Welfare: The deficit of a country may increase if it has many costly social welfare programs.

  6. Interest on Debt: It's possible that interest payments on a government's debt may be large, adding even more to the deficit.

How Can we reduce Fiscal Deficit

  1. By reducing our import bills (or expenditure)

  2. By Fiscal Consolidation / Discipline

  3. Increasing Revenue of the Government

What are the consequences of a high fiscal deficit in India?

A high fiscal deficit can lead to increased government borrowing, which raises the rate of interest and reduces the availability of credit for private investment. This can hamper economic growth. Moreover, a large fiscal deficit can also put pressure on inflation rates, as excessive government spending may result in an increased money supply.

A higher Fiscal Deficit means high Inflation.

fiscal deficit upsc

Thank you for reading Fiscal Deficit UPSC in a simplified way.

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