Budget 2022 Demystified: What is fiscal deficit? How is it calculated?

By Team Newsable | First Published Jan 14, 2022, 8:59 AM IST

One of the many indicators on which the Budget 2022 will be assessed is the fiscal deficit.

Like every year, the government will be presenting the Union Budget in Parliament in February. One of the many indicators on which Budget 2022 will be assessed is the fiscal deficit. But sure of what fiscal deficit means and why it matters? Read on...

What is a fiscal deficit?

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Basically, the fiscal deficit is the difference between the government’s total revenue and total expenditure. It provides an indication of how much borrowing is required by the government. The Government of India describes fiscal deficit as the excess of total payouts from the consolidated fund of India, excluding debt repayment, over total receipts into the fund (excluding the debt receipts) during a financial year.

Generally, a fiscal deficit is caused either by a massive surge in capital expenditure or through a revenue deficit. Capital expenditure or Capex is involved while setting up long-term assets such as buildings, factories and other developments. Generally, deficits are financed via borrowing from either the Reserve Bank of India or through funds raised from capital markets by means of Treasury Bills and Bonds.

How is fiscal deficit calculated?

The fiscal deficit is computed, taking into account the difference between the government expenditure and the total income earned. The components through which the government earns its revenue include Goods and Service Tax, income tax, corporation tax, customs duty, interest receipts, dividends and profits, interest receipts, dividends and profits, Union Territory taxes, Union excise duty, external grants, other non-tax revenues and receipts of the Union territories.

At the same time, government expenditure includes interest payments, revenue expenditure, capital expenditure and grants-in-aid for the creation of capital assets.

Is fiscal deficit a bad sign?

Fiscal deficit is a common feature of all economies. It's a rare phenomenon for an economy to report a surplus. For any economy around the world, a high fiscal deficit is not always seen as bad for the economy, especially if the funds are to build roads, airports and Railway lines. That's because these expenditures help generate funds for the government at a later stage.

India’s fiscal deficit

In 2020-21, India’s fiscal deficit was 9.3 per cent or Rs 18.21 lakh crore of GDP. According to Fitch Ratings, India is expected to improve its fiscal deficit to 6.6 per cent of GDP this fiscal. The Narendra Modi government expects a deficit of 6.8 per cent of GDP or Rs 15.06 lakh crore for the current fiscal.

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