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Fiscal Deficit

Fiscal Deficit

Fiscal deficit is the difference between the total revenue and the total expenditure of the government. Fiscal deficit occurs when the government's total spending surpasses the revenue that it generates.

 

In most cases, this gap is made up through external borrowings. Maintaining fiscal deficit is not always bad, and many a times it is recommended to spur growth when the economy begins to show signs of slowdown or during the period of recession. The government's expenditure boosts the demand, thereby lifting the country's economic momentum.

 

Maintaining a large fiscal deficit has its downsides too. If the government borrows a large amount from the market, then the cost of borrowing increases for both the common man and the government. High fiscal deficit also causes inflationary pressures.

 

If the government spending generates additional demand for the same amount of goods and services, they tend to get dearer. Additionally, if a country's central bank resorts to monetising the deficit by buying government bonds, money supply increases in the economy, resulting in inflation.

 

A deficit is usually financed through borrowing from either the Reserve Bank of the country or by raising money from the capital markets by issuing instruments such as treasury  bills and bonds.

 

For a developing country like India, maintaining high fiscal defict is justified as the government is required to spend more on infrastructure etc.

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