Fiscal Deficit

By: EconomyWatch   Date: 30 June 2010

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Fiscal deficit is an economic phenomenon, where the Government's total expenditure surpasses the revenue generated . It is the difference between the government's total receipts (excluding borrowing) and total expenditure. Fiscal deficit gives the signal to the government about the total borrowing requirements from all sources.

Components of fiscal deficit

The primary component of fiscal deficit includes revenue deficit and capital expenditure.

Revenue deficit: It is an economic phenomenon, where the net amount received fails to meet the predicted net amount to be received.

Capital expenditure: It is the fund used by an establishment to produce physical assets like property, equipments or industrial buildings. Capital expenditure is made by the establishment to consistently maintain the operational activities.

In India, the fiscal deficit is financed by obtaining funds from Reserve Bank of India, called deficit financing. The fiscal deficit is also financed by obtaining funds from the money market (primarily from banks).

Arguments: Fiscal deficit lead to inflation

According to the view of renowned economist John Maynard Keynes, fiscal deficits facilitates nations to escape from economic recession. From another point of view, it is believed that government need to avoid deficits to maintain a balanced budget policy.

In order to relate high fiscal deficit to inflation, some economists believe that the portion of fiscal deficit, which is financed by obtaining funds from the Reserve Bank of India, directs to rise in the money stock and a higher money stock eventually heads towards inflation.

Expert recommendation

Financial advisors recommend that the Government should not promote disinvestment to reduce fiscal deficits. Fiscal deficit can be reduced by bringing up revenues or by lowering expenditure.

Impact

Fiscal deficit reduction has an impact over the agricultural sector and social sector. Government's investments in these sectors will be reduced.


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