Fiscal Deficit is the difference between the Revenue Receipts plus Non-debt Capital Receipts (NDCR) and the total expenditure”.

In other words, the fiscal deficit is “reflective of the total borrowing requirements of Government”.

What is the significance of fiscal deficit?

In the economy, there is a limited pool of investible savings.

These savings are used by financial institutions like banks to lend to private businesses (both big and small) and the governments (Centre and state).

An high fiscal deficit implies that there is a lesser amount of money left in the market for private entrepreneurs and businesses to borrow.

The lesser amount of this money, in turn, leads to higher rates of interest charged on such lending.

So, simply put, a higher fiscal deficit means higher borrowing by the government, which, in turn, means higher interest rates in the economy.

What is the acceptable level of the fiscal deficit?

There is no set universal level of fiscal deficit that is considered good.

Typically, for a developing economy, where private enterprises may be weak and governments may be in a better state to invest, the fiscal deficit could be higher than in a developed economy.

In developing economies, governments also have to invest in both social and physical infrastructure upfront without having adequate avenues for raising revenues.

Note:

In India, the Fiscal Responsibility and Budget Management Act require the central government to reduce its fiscal deficit to 3 percent of GDP.

India has been struggling to achieve this mark.

Topic- GS Paper 3 – Economics

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