(Source: BloombergQuint)

BQ Explains: What Is Fiscal Deficit?

A government is said to run a fiscal deficit when its expenditure exceeds the revenue it generates. In most cases, the government makes up for this gap through external borrowings.

A fiscal deficit is not always bad. In certain circumstances, economists recommend running a larger fiscal deficit to spur economic spending when the economy is facing a slowdown, or at the time of recession. That in turn, boosts demand and can help lift economic momentum.

However, there are downsides to maintaining a large fiscal deficit too. If the government borrows large sums from the market, the cost of borrowing surges for both the common man and the government.

Second, it leads to 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.

As for India, a developing economy, maintaining a fiscal deficit is justified as the government needs to spend more on infrastructure development. But according to the revised Fiscal Responsibility and Budget Management Act, the government was required to bring its fiscal deficit down to 3 percent by 2017-18. Since the target has already been pushed back two year at least, India’s credibility is at stake.