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Fiscal Deficit: Conceptual Understanding and Budget 2021-22

May 26, 2021

The concept of fiscal deficit was widely discussed after presentation of union budget 2021-22 by Hon. Finance Minister, Nirmala Sitaraman. Main point of discussion was fiscal deficit number, which for the current budget is estimated at 6.9 percent of GDP, and expected to reduce to 4.5 percent by 2025-26.  The original fiscal deficit planned for the year 2020-21was 3.5 percent which increased to 9.5 percent because of the impact of COVID – 19 pandemic.  Because of the spread of pandemic and resultant lockdown, revenue decreases to its minimum level, and on the other hand, government expenditure increases to its highest level due to excessive spending by the government for protecting vulnerable sections of the society. According to the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, fiscal deficit is targeted at 3 percent of GDP. Finance minister has proposed to pass FRBM Act amendment bill to reflect the changes in fiscal deficit figures and proposed road map for bringing fiscal deficit back to its track.

Fiscal deficit, in simple terms, is excess of total expenditure of the government over its total revenue, which also indicates the borrowing requirements of the government. While computing the total revenue of the government, revenue from borrowing is not included. Fiscal deficit is computed either as a percentage of GDP or absolute term. Fiscal deficit is financed through borrowings, either by market borrowing, borrowings from Reserve Bank of India or external borrowings, which increases the national debt. Following table gives details of fiscal deficit in India;

Actual for the year 2019-20 Rs. 9,33,651 Crore (4.6 percent of GDP)

Budgeted for the year 2020-21 Rs. 7,96,337 Crore (3.5 percent of GDP)

Revised estimate for 2020-21 Rs. 18,48,655 Crore (9.5 percent of GDP)

Budgeted for 2021-22 Rs. 15,06,812 Crore (6.8 percent of GDP) Government proposed to spend total Rs. Rs 34,83,236 Crore during the year 2021-22, against total revenue, excluding borrowing is Rs. Rs 19,76,424 crore and total borrowings of Rs. 15,06,812 Crore. When the fiscal deficit is financed through borrowings, it increases public expenditure in subsequent years due to interest payment and repayment of loans. Out of total expenditure proposed for the year 2021-22, nearly Rs 809701 Crore (23 percent) is estimated for interest payment to service past borrowings.

Dr. Kishor Bhanushali, Director Academic Administratoin, Unitedworld School of Business (UWSB)

Disclaimer: The opinions / views expressed in this article are solely of the author in his / her individual capacity. They do not purport to reflect the opinions and/or views of the College and/or University or its members.

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