Budget 2023: Know What Is Fiscal Deficit And How It Impacts Economy

The annually presented Budget gives an account of the revenue and expenditure of the government. Additionally, It also provides an account of the financial prudence of the economy

Fiscal deficit is the term used to describe the gap between the government's total revenue and total expenditure excluding borrowing. ( Image Source :Canva )

We are less than a week away from the announcement of the Union Budget 2023. The annually presented Budget by the government gives an account of the revenue and expenditure of the government. Additionally, It also provides an account of the financial prudence of the economy. It can be determined by a number of indicators presented in the Budget. One of those indicators is Fiscal Deficit. 

What Is Fiscal Deficit? 

Fiscal deficit is the term used to describe the gap between the government's total revenue and total expenditure excluding borrowing. It serves as an indication of the total amount of borrowings the government will require. 

Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts)

Non-debt-creating capital receipts are those receipts that are not borrowings and, therefore, do not give rise to liabilities for the government. This includes the recovery of loans and the proceeds from the sale of PSUs. 

In most cases, a fiscal deficit results from either a reduction in revenue or a significant increase in capital expenditures. 

Financing Fiscal Deficit

The fiscal deficit will have to be financed through borrowing. Thus, it indicates the total borrowing requirements of the government from all sources. A deficit is often funded by borrowing from the nation's central bank or by raising funds on the capital markets by issuing various securities like treasury bills and bonds.

Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad

Net borrowing at home consists of borrowing from the public directly through debt instruments (such as the different small savings plans) and indirectly from commercial banks through Statutory Liquidity Ratio (SLR).

How Fiscal Deficit Affects Economy 

An important factor in determining the stability of the economy and the financial health of the public sector is the gross fiscal deficit. It is clear that revenue deficit is a component of fiscal deficit from the way gross fiscal deficit is calculated.  

Fiscal Deficit = Revenue Deficit + Capital Expenditure - non-debt creating capital receipts

A large share of revenue deficit in fiscal deficit indicated that a large part of borrowing is being used to meet the government's operational expenditure needs rather than investment.

Primary Deficit 

We must note that the borrowing requirement of the government includes interest obligations on the accumulated debt. The goal of measuring primary deficit is to focus on present fiscal imbalances. So in simple terms, Gross Primary Deficit is Gross Fiscal Deficit minus interest payments. 

Gross Primary Deficit = Gross Fiscal Deficit - Net interest liabilities 

Net interest liabilities consist of interest payments minus interest receipts by the government on net domestic lending. Primary deficit is an estimate of money needed to be borrowed due to current spending exceeding revenue. A decreasing primary deficit suggests that fiscal health is improving. 

How Union Budgets See Fiscal Deficit

In the Budget documents, the government gives accounts for Revenue Deficit, Effective Revenue Deficit, Fiscal Deficit, and Primary Deficit. The Medium-Term Fiscal Policy Statement presented to Parliament under Section 3(2) of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, establishes three-year rolling targets for four specific fiscal indicators in relation to GDP at market prices. The deficit as a percentage of GDP makes comparison easier and helps us see things clearly. 

Here Is What Government Said In Last Budget About Fiscal Deficit

In Union Budget 2022 the Budget estimate for FY23 projects total expenditures of Rs 39.45 lakh crore and total receipts other than borrowings of Rs 22.84 lakh crore. The entire receipts are made up of capital receipts worth Rs 0.79 lakh crore and revenue receipts totaling Rs 22.04 lakh crore. 16.61 lakh crore is the anticipated fiscal deficit, according to Budget 2022.

In the Medium-Term Fiscal Policy Statement of Budget 2022, the government said that the FRBM framework mandated the central government to limit the fiscal deficit to up to 3 per cent of gross domestic product (GDP) by March 31, 2021.

However, due to the unprecedented nature of the Covid-19 shock, on economic growth and other fiscal parameters, the fiscal deficit was increased from 3.5 per cent of GDP in BE (Budget Estimates) 2020-21 to 9.5 per cent of GDP in RE (Revised Estimates) 2020-21. Uncertainties caused by the pandemic have continued through 2021 into 2022, the government said. 

The government estimated that the fiscal deficit target for RE 2021-22 would be 6.9 per cent as against 6.8 per cent of GDP in BE 2021-22 due to “increased development/ welfare-related expenditures to contain the pandemic and to provide succor to the people.” 

In BE 2022-23, the fiscal deficit is projected at 6.4 per cent of GDP, which is lower than RE 2021-22, the Budget 2022 said. 

The government said, “As announced in the Budget for FY21- 22, the government would continue on its path of fiscal consolidation to attain a fiscal deficit to GDP level below 4.5 per cent by FY25-26 through a fairly steady decline over this period.”

The central government planned gross and net borrowings through dated securities of about 14.95 lakh crore and 11.09 lakh crore, respectively, in BE 2022-23, according to Budget documents. This amount is 24 per cent higher than the gross borrowings of 12.05 lakh crore planned in BE 2021-22. The increase is on account of higher loan repayments in FY22-23 and changes in fiscal deficit in nominal terms.

Other sources of financing fiscal deficit are NSSF investments in Special securities of the central government, short-term treasury bills, net external assistance, public account balances, etc. For financing fiscal deficit in BE 2022-23, borrowing from NSSF is estimated at about 4.25 lakh crore; whereas, those from external sources and State Provident Funds are estimated at 0.19 lakh crore and 0.20 lakh crore, respectively, the government said.

Expectation And Prediction For Budget 2023

According to a Goldman Sachs report, the government will have no trouble reaching its goal for the current fiscal year's fiscal deficit. Given that the GDP is consistently growing, it is anticipated that the BE for the fiscal deficit in the fiscal year 2024 will be lower than the target of the present fiscal. According to the reports, the government would set the Budget deficit objective for the upcoming fiscal year at 5.8–5.9 per cent, which is a 50–60 basis point decrease from the BE.

This reduction will be backed by a decline in food and fertilizer subsidies, the report said. Goldman Sachs said that the withdrawal of the free food plan will likely reduce the subsidy bill to 0.8 per cent of GDP, while fertilizer subsidy will reduce to 0.5 per cent of the GDP.