DAILY NEWS ANALYSIS

28 November, 2020
4 Min Read

Fiscal deficit reaches 120% of annual target

The Union Government’s fiscal deficit further widened to 9.53 lakh crore, or close to 120% of the annual budget estimate, at the end of October of the current fiscal.

Reasons behind this:

The deficit widened mainly due to poor revenue realisation.
The lockdown imposed to curb spreading of coronavirus infections had significantly impacted business activities and in turn, contributed to sluggish revenue realisation.

What is the fiscal deficit?

It is the difference between the Revenue Receipts + Non-debt Capital Receipts (NDCR) and the total expenditure.
In other words, the fiscal deficit is “reflective of the total borrowing requirements of Government”.

Impact of high fiscal deficit:

In the economy, there is a limited pool of investible savings. These savings are used by financial institutions like banks to lend to private businesses (both big and small) and the governments (Centre and state).
If the fiscal deficit ratio is too high, it implies that there is a lesser amount of money left in the market for private entrepreneurs and businesses to borrow.
Lesser amount of this money, in turn, leads to higher rates of interest charged on such lending.
A high fiscal deficit and higher interest rates would also mean that the efforts of the Reserve Bank of India to reduce interest rates are undone.

What is the acceptable level of fiscal deficit for a developing economy?

For a developing economy, where private enterprises may be weak and governments may be in a better state to invest, the fiscal deficit could be higher than in a developed economy.
Here, governments also have to invest in both social and physical infrastructure upfront without having adequate avenues for raising revenues.
In India, the FRBM Act suggests bringing the fiscal deficit down to about 3 percent of the GDP is the ideal target. Unfortunately, successive governments have not been able to achieve this target.

Source: TH

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