Budget Explainer - Fiscal Deficit

Let's say that your monthly salary is ₹10,000 but your expenses are ₹15,000. This means that you're short of ₹5000. 

When this happens with the government i.e. there's a difference between the money it has and the money it spends, it is called fiscal deficit.

It is an indication of the total borrowings needed by the government.

While it might seem like this is a problem, Fiscal Deficit can be good. Read on to know why: 

1. Moderate Deficit = Growth

As long as the fiscal deficit is in moderation, it means that the government is spending money on schemes and infrastructure projects. It helps the economy by boosting production and increasing employment opportunities. 

But a higher than moderate fiscal deficit creates problems. It makes the government borrow more money so there’s less money for others and leads to higher interest rates. And it also negatively impacts the government as it has to repay the amount as well as the interest which may push it in a debt trap.

2. How is Fiscal Deficit Met?

The government bridges the gap between revenue and expenditure by borrowing money from the central bank or raising it from capital markets by issuing treasury bills and bonds.

3. New Year = New Target

Every year the government sets a fiscal deficit target in the Union Budget. Fiscal deficits are mentioned as a percentage of the GDP and for the current year, the government has budgeted the fiscal deficit to be ₹16.61 lakh crore or 6.4% of the GDP.

And that’s all about the fiscal deficit. But do you want to know more about the Union Budget in a simple and easy to understand language? Just follow Upstox!