Fiscal deficit in Budget
Fiscal deficit is the difference between total revenue and expenditure of government. Revenue deficit is the part of fiscal deficit. When the interest payments are reduced from fiscal deficit, we will get primary deficit. Interest is meant the payment of the government to its creditors. The mismatches in the expected revenues and expenditure can bring revenue deficit. Revenue deficits occur when government’s actual revenue receipts are less than expected. If the actual recipts are higher than expected, it will bring revenue surplus.
Fiscal deficit will give signal to the government about the total borrowing requirement from all sources. The primary component of fiscal deficit includes revenue deficit and capital expenditure. Capital expenditure is the fund used for the establishment of physical assets like property, equipments and industrial borrowings.
Fiscal deficit can be financed by borrowing money from Reserve Bank. This process is called deficit financing. What is the relation between fiscal deficit and inflation? It is discussed in this article. There are two kinds of arguments. First argument is the fiscal deficit financed by the RBI increases money stock. It may increase inflation so that more money chases same goods. There is another argument. Increased fiscal deficit can increase the output of goods. High fiscal deficit will increases demand and this it will increase inflation. The increase in demand caused by fiscal deficit will increase prices.
Methods to decrease fiscal deficit
There are two ways to decrease the fiscal deficit.
One is to increase the revenue and another is to decrease the expenditure. High fiscal deficit make three problems. They are balance of payment crisis, high interest rates and inflation by the deprecation of currency. When an economy is running in its highest level of output, fiscal deficit can cause high inflation. According to Pranab Mukherjee, India cannot keep high fiscal deficit in a long run.
Indian economy is the ninth largest one in terms of nominal GDP and third largest in terms of purchasing power. The fiscal deficit will be usually expressed in percentage. If we know the GDP value, we will get fiscal deficit in percentage. The finance minister has announced various financial reforms like goods and service tax, direct tax code. Indian fiscal deficit is expected to be high in the coming years. High fiscal deficit really made negative impacts in the stock markets too. Indian stock markets were crashed near 1% from day’s high in the Budget day.