Context:

The Centre’s Fiscal deficit increased to Rs 4.51 lakh crore in April-June from Rs 2.10 lakh crore in April-May, according to data released by the Controller General of Accounts.

About Fiscal Deficit:

• Fiscal deficit is the difference between the government’s total expenditure and its total revenue (excluding borrowings).
• In mathematical terms:
  • Fiscal Deficit = Total budget expenditure – Total budget receipts excluding borrowings
• It is an indicator of the extent to which the government must borrow in order to finance its operations and is expressed as a percentage of the country’s Gross Domestic Product (GDP).

Components of the Fiscal Deficit: 

• Income Component: The income component is made of two variables, revenue generated from taxes levied by the Centre and the income generated from non-tax variables. 
  • The taxable income consists of the amount generated from corporation tax, income tax, Customs duties, excise duties, GST, among others. 
  • The non-taxable income comes from external grants, interest receipts, dividends and profits, receipts from Union Territories, among others.
• Expenditure Component: The government in its Budget allocates funds for several works, including payments of salaries, pensions, emoluments, creation of assets, funds for infrastructure, development, health and numerous other sectors that form the expenditure component.
• A high Fiscal deficit at times emerges:
  • if the government is spending on developmental works like construction of highways, ports, roads, airports.
  • due to high consumption expenditure

Positive Aspects of Fiscal Deficit:

• Role of Fiscal Deficit in Stimulating Economic Growth: Fiscal deficit allows the government to boost expenditure on essential public services, infrastructure, and other critical sectors, which, in turn, can act as a catalyst for economic growth.
• Social Welfare Schemes: Governments can use fiscal deficits to finance social welfare programs, such as healthcare, education, and poverty alleviation initiatives. 

Negative Aspects of Fiscal Deficit:

• Loss of Investor Confidence: High fiscal deficit without corrective measures can erode investor confidence, leading to capital flight and reduced foreign investment.
• Crowding-out effect: When the government runs a fiscal deficit and borrows funds from the financial markets, which causes a crowding-out effect.
  • The crowding-out effect refers to a phenomenon where increased government spending or borrowing leads to reduced private sector investment.    
• Potential Downgrade in Credit Rating: Credit rating agencies might lower a country’s credit rating if its fiscal deficit is seen as unmanageable or unsustainable.

News Source:  The Hindu

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