What is fiscal deficit?

Fiscal deficit is an economic phenomenon, where the Government's total expenditure exceeds the revenue generated (excluding money from borrowings). It is the difference between the government's total receipts (excluding borrowing) and total expenditure. Deficit differs from debt, which is an accumulation of yearly deficits. Fiscal deficit gives the signal to the government about the total borrowing requirements from all sources. While calculating the total revenue, borrowings are not included.

Generally fiscal deficit takes place due to either revenue deficit or a major hike in capital expenditure. Capital expenditure is incurred to create long-term assets such as factories, buildings and other development.
A deficit is usually financed through borrowing from either the central bank of the country or raising money from capital markets by issuing different instruments like treasury bills and bonds.

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).

Difference between fiscal and primary deficit

Primary deficit is one of the parts of fiscal deficit. While fiscal deficit is the difference between total revenue and expenditure, primary deficit can be arrived by deducting interest payment from fiscal deficit. Interest payment is the payment that a government makes on its borrowings to the creditors.

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.

REVENUE DEFICIT

A mismatch in the expected revenue and expenditure can result in revenue deficit. Revenue deficit arises when the government's actual net receipts is lower than the projected receipts. On the contrary, if the actual receipts are higher than expected one, it is termed as revenue surplus.
A revenue deficit does not mean actual loss of revenue. Let's take an hypothetical example, if a country expects a revenue receipt of Rs 100 and expenditure worth Rs 75, it can result in net revenue of Rs 25. But the actual revenue of Rs 90 is realised and an expenditure is Rs 70.
This translates into net revenue of Rs 20, which is Rs 5 lesser than the budgeted net revenue and called as revenue deficit

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.