Every time economists sense India is or will be in

trouble, the phrase fiscal deficit often pops up. While

some experts believe that fiscal deficit is a positive
that helps the country grow, conservatives think
otherwise, favoring a balanced budget policy.

Heres a start to understanding what fiscal deficit
means and why it really matters to Indias economic
wellbeing.

What is fiscal deficit?

Fiscal deficit is the difference between the
governments expenditures and its revenues
(excluding the money its borrowed). A countrys
fiscal deficit is usually communicated as a
percentage of its gross domestic product (GDP).

Considering that the Indian economy is growing
between 5 to 5.5 percent in the financial year ended
March 2013, fiscal deficit is definitely a challenge to
the economy. According to the World Bank, growth
in India is projected to rise to 6.5 percent and 6.7
percent in FY2014 and FY2015, respectively.

All said and done, Indias fiscal deficit has been the
centre of debate for many occasions this year. And in
April, Finance Minister, P Chidambaram has
brought it down from 4.9 percent last year to 4.8
percent of the GDP in 2013-14.

What are the causes of fiscal deficit?

Government spending, inflation and lower revenue
are among some of the main factors that point to
fiscal deficit. The cynical nature of fiscal deficit does
not only jeopardize the growth of the country but
also the governments economic management
abilities.

In an ideal financial system, which has a balanced
fiscal deficit, the cost of expenditure is low while
production and growth is advancing. But when there
is an increase in fiscal deficit it means that the
government is spending too much while it is earning
less. Hence, it is important that the government
keeps its expenses under control.

One way the government earns money, is through
taxes. For example, if the government lowered taxes
or provided tax concessions to a particular group of
people, then it would earn less, leading to an
increase in fiscal deficit. And thats one of the
reasons why you will find the government giving a
face-lift to the tax structures. In the same context,
cutting of custom duty and excise duty will lead to
declining revenues.

Like India, many developing countries are making
an effort to resolve big fiscal deficits. On the bright
side, for India, among other sources of revenue,
foreign investments and inflow of remittance s from
Indians living overseas has helped avoid very high
deficits.

Fiscal deficit does not come about only in case of
creating less revenue and spending more money.
Another major reason for a growing fiscal deficit can
be slow economic growth or sluggish economic
activities.

How fiscal deficit can be bad for India?

A large fiscal deficit is an indication that the
economy is in trouble and will have reasons to
worry. A high fiscal deficit could pose an inflation
risk, minimize the growth of the economy, doubt the
governments abilities; it could affect the countrys
sovereign rating, which in turn will limit foreign
investors from looking at India as one of the
investment hubs.

It is believed that high fiscal deficit can be corrected.
For example, if the government could not control its
expenditures, it could raise taxes to cover up for the
extra amount of money spent. When taxes increase,
consumers will involuntarily have to cut down on
their expenditure to pay the government.

Also, the government expenditure puts pressure on
interest rates creating a negative impact on savings.
And yes, the Indian government can choose to
import money into the country to balance the
soaring fiscal deficit, but this move could appreciate
the countrys currency and the government will have
to pay interest on its borrowings, eventually
increasing the deficit and affect the countrys
economic growth. Therefore, delay in adjusting high
fiscal deficit shows that the government cannot
control its finances properly.

Did you know that several government projects are
stalled because of high fiscal deficit? Heres why.
When a country labors under high fiscal deficit, it
limits the governments spending capacity and this
has an effect on the continuous funds various
projects need. Infrastructure projects, or welfare
policies, or education and healthcare projects, for
example.

The trouble with high fiscal deficit is that it leads to
higher interest rates, disturbing the entire economy.

Since the government is not earning much, it will
have to restrict its expenses, unless it chooses to
borrow. And since the government abilities are
doubted idue to its incapacity to control its
profligacy, it is very difficult for the government to
access loans. And even if it gets loans, they are at
given at high interest rates. On the one hand, the
government borrows because it does not have
enough money, and on the other hand, it has to pay
more for borrowing money. Hence, fiscal deficit
leads to a slow progress of the nation.

Difference between fiscal deficit and budget
deficit

Budget deficit is commonly known as the national
debt. Budget deficit means that a country has more
money going out when compared to the money its
earning. Budget deficits can usually be resolved by
raising taxes, cutting spending or a combination of
both. Unlike fiscal deficit, while calculating budget
deficit, the countrys borrowings are taken into
consideration. Indias budget deficit last fiscal year
was 4.9 percent of gross domestic product.

In case of fiscal deficit, it can be measured without
taking into account the interest it pays on its debt.
Fiscal deficit is basically the difference between the
money it spends and the money it makes.

Difference between fiscal deficit and current
account deficit

Fiscal deficit is a percentage of the nations GDP and
can be considered as an economic event in which the
government expenditure exceeds its revenue.
Meanwhile, current account deficit occurs when the
countrys imports are greater than the countrys
exports of goods, services and transfers.

Most developing countries run a short term current
account deficit to boost domestic productivity, which
could lead to increase in exports in the future.

After Indias current account deficit hit a historic
high of 6.7 percent of GDP in Q3 of last fiscal year, it
was at 5 percent of the GDP in the year ended
March, making the rupee weak and also making way
for lower interest rates.

Indias fiscal deficit and its current affairs

According to government data, Indias fiscal deficit
during 2012-13 financial year was 4.9 percent of the
nations gross domestic product. While China aims
to keep its fiscal deficit below 3 percent this year,
lets take a look at how fiscal deficit is making news
in India.

Curbing import on gold is one of the measures taken
by the government to correct the countrys fiscal
deficit. But with a weakening rupee and increase in
global oil prices, the finance minister might put a
cap on the countrys expenditure to avoid pressure
on fiscal deficit.

In previous years, growing fiscal deficit has given
rise to the balance of payment crises. But in the
recent years, the government has taken action steps
to correct the situation by cutting service taxes,
excise duty and carefully stepping up government
expenditure.

Also, when the cabinet decided to come out with the
Food Security Bill which guaranteed quality food
grains at subsidized rates, the concern of fiscal
deficit slipping by 0.5 percent was predicted by
experts. And then earlier in July, the Government of
India reassured the nation that execution of the
Food Security Bill will not affect the fiscal deficit
target for the year.

Fiscal deficit has been a key concern for credit rating
agencies and RBI is likely to be on alert when it pays
its debt because paying high interests with cautious
investors amid rising deficits might not be
considered a smart move.

Why is Indias fiscal deficit continually high?

While the government fights to manage money, here
are a few reasons why India has a soaring fiscal
deficit. It is high because in the corporate sector,
bailouts are becoming common and subsidies are
being high. The money that the government earns
through non-tax revenue is not big and the money it
earns from taxes is not enough.