Page 23 - Banking Finance August 2023

ARTICLE

determine how much the government is exceeding its and selling them through the banks. Banks buy those
income. deposits and then sell them to the investors. Government
bonds are considered a safe form of investment. Hence, they
How is Fiscal Deficit Calculated? are free from risks.

Fiscal deficit is calculated by subtracting the total revenue
obtained by the government in a fiscal year from the total What are the impacts of fiscal deficit on
expenditures that it incurred during the same period.
economy?
Mathematically, it can be represented as follows: A high fiscal deficit can lead to inflation, devaluation of the
currency and an increase in the debt burden. While a lower
Fiscal deficit = Total Expenditure - Total
fiscal deficit is seen as a positive sign of fiscal discipline and
revenue (Excluding the borrowings)
a healthy economy. Fiscal deficit is having both positive and
negative aspects.
Fiscal deficit is seen in all the economies, while the surplus
is considered a rare occurrence. A high fiscal deficit is not
Positive Aspects of Fiscal Deficit:
always considered bad for the economy. It is good if the
amount is used in constructing roads, railways, airports, etc. Increased Government Spending: Fiscal deficit enables the
These help in generating revenue for the government after government to increase spending on public services,
a certain period. infrastructure, and other important areas that can stimulate
economic growth.
For example, if the GDP of a country is Rs. 100 lakh crore
and the difference between total income and expenditure
Finances Public Investments: The government can finance
is Rs. 10 lakh crore then the fiscal deficit is 10%.
long-term investments, such as infrastructure projects,
through fiscal deficit.
What are the Components of Fiscal
Deficit? Job Creation: Increased government spending can lead to
job creation, which can help reduce unemployment and
The fiscal deficit is composed of two components, namely
increase the standard of living.
income and expenditure. The components are discussed in
brief in the following lines:
Components of total income of the government Negative Aspects of Fiscal Deficit:
These consist of two variables, which are revenue generated Increased Debt Burden: A persistent high fiscal deficit leads
from various taxes such as GST, taxes from union territories, to an increase in government debt, which puts pressure on
custom duties, corporation tax, etc. They are collected by the future generations to repay the debt.
centre and the non-tax revenues that consist of dividends and
profits, interest receipts, and other non-tax revenues. Inflationary Pressure: Large fiscal deficits can lead to an
increase in money supply and higher inflation, which reduces
Components of expenditure:
the purchasing power of the general public.
The government expenditure consists of capital expenditure
and revenue expenditure such as salary and pension
Crowding out of Private Investment: The government may
payments, grants for creation of capital assets,
have to borrow heavily to finance the fiscal deficit, which
infrastructure, healthcare, and interest payments.
can lead to a rise in interest rates, and make it difficult for
the private sector to access credit, thus crowding out
Fiscal deficit is calculated as a percentage of the GDP (gross
private investment.
domestic product).
Balance of Payments Problems: If a country is running large
How does the government balance the
fiscal deficits, it may have to borrow from foreign sources,
fiscal deficit? which can lead to a decrease in foreign exchange reserves
Governments take borrowings in the form of issuing bonds and put pressure on the balance of payments.

BANKING FINANCE | AUGUST | 2023 | 23