What is fiscal deficit?

When the government's expenditure is over and above its income it results in a fiscal deficit. The government's revenues comprises of taxes, duties, levies, sale of stake in public sector units, sale of telecom spectrum etc.

On the other hand its expenditure comprises defense expenditure, subsidy burden on fuel fertilizer and food, infrastruture development etc.

India's fiscal deficit was projected at 5.1% of GDP in the Union Budget for 2012-2013 by the then Finance Minister Pranab Mukherjee.

However, the same is expected to rise to 5.3 per cent as the government's tax mop up has been lower than expected.

A consistently high fiscal deficit is not good for the economy. For the last couple of years India's fiscal deficit has been a cause for worry and global rating agencies have even threatened a downgrade of India's sovereign ratings as the fiscal deficit is worryingly high.

India's real problems come from the high subsidies in the expenditure side which have actually weighed on the fiscal deficit. Subsidies include those in fuel, fertilizer and food. While the government has taken measure to control the fuel side subsidies by partially de-regulating diesel, it has not been able to reduce the other subsidies.

To reduce the deficit the government can either raise taxes or reduce its income. Also, over the last one year it has been badly hit on the revenue side particularly direct taxes, because of the slowdown in the corporate sector.

India's fiscal deficit during the April-November period was Rs. 4.13 trillion or 80.4% of the budgeted full fiscal year 2012-13 target.

Union Finance Minister P Chindambaram has promised fiscal consolidation and all eyes would be on his fiscal deficit targets for 2013-2014 when he delivers his Union Budget on Feb 28. Reports indicate that he is likely to set a target of 4.8 per cent of GDP.

GoodReturns.in