When a government’s total expenditure exceeds the revenue that it generates, it is called a fiscal deficit.
For example, if the government plans to spend ₹100 crore but its earnings are ₹80 crore, the difference of ₹20 crore is the fiscal deficit.
The Indian government finances the fiscal deficit by borrowing from commercial banks, the RBI, the public, the IMF, etc.
The government has to pay interest on its borrowings. In the Interim Budget 2024, 20% of the total expenditure was towards interest payments on loans.
The fiscal deficit is stated as a percentage of the GDP. In the Interim Budget 2024, the government had pegged the fiscal deficit target at 5.1% of the GDP for FY25.
The government may bring it down to 4.9-5% in FY25. The Finance Minister has set a target to reduce the fiscal deficit to 4.5% or less by FY26.
Fiscal deficits are the norm globally, with only 47 out of 222 countries not having a fiscal deficit as per the CIA factbook for 2017.
While fiscal deficit is important from a growth perspective, it is imperative to keep it under control.