Context:
Centre’s fiscal deficit at the end of the first quarter was 25.3% of the full-year target.
What is Fiscal Deficit?
- Difference between the government’s total expenditure and its total revenue (excluding borrowings).
- Expressed as a percentage of the country’s GDP.
- Indicator –
- High fiscal deficit: Inflation, devaluation of the currency, increase in the debt burden etc.
- Low fiscal deficit: Positive sign of fiscal discipline and a healthy economy.
- Merits –
- Increased Government Spending
- Finances Public Investments
- Reduce unemployment
- Increase standard of living
- Demerits –
- Reduces purchasing power
- Balance of Payments Problems
- Crowding out of Private Investment
Other Types of Deficits:
- Revenue Deficit –
- Refers to the excess of government’s revenue expenditure over revenue receipts.
- Revenue Deficit = Revenue expenditure – Revenue receipts
- Primary Deficit –
- Difference between the current year’s fiscal deficit and the interest paid on the borrowings of the previous year.
- Primary deficit = Fiscal deficit – Interest payments
- Effective Revenue Deficit –
- Difference between revenue deficit and grants for creation of capital assets.
- Suggested by – Rangarajan Committee on Public Expenditure.
- Effective Revenue Deficit = Revenue Deficit – Grants in aid for capital assets
Source: The Hindu
Previous year question
Which one of the following is likely to be the most inflationary in its effect?
[UPSC Civil Services Exam – 2021 Prelims]
(a) Repayment of public debt
(b) Borrowing from the public to finance a budget deficit
(c) Borrowing from the banks to finance a budget deficit
(d) Creation of new money to finance a budget deficit
Practice question
