DMPQ- In the current COVID-19 crisis , the government is facing the issue of breaching the comfortable limit of fiscal deficit. What are the consequences of high fiscal deficit?

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Fiscal deficit refers to the excess of total budget expenditure over total budget receipts excluding borrowings during a fiscal year.

Fiscal Deficit = Total Budget Expenditure – Total Receipts excluding borrowings = Revenue Expenditure + Capital Expenditure – Revenue receipts – Capital Receipts of only non-debt type

 

Implications of high fiscal deficit on economy:

  • Debt trap: A high fiscal deficit means high borrowing and as the government borrowing increases, its liability in future to repay loan amount along with interest thereon also increases. Interest payments increase revenue expenditure leading to higher revenue deficit which may compel government to borrow further.
  • Inflationary pressure: It leads to higher inflation due to demand push being generated by higher government expenditure.
  • Retards future growth: Borrowing is a financial burden on future generation to pay loan and interest amount, which retards growth of economy.
  • Increase in taxation: Higher fiscal deficit means government is not able to earn as much as it is spending so often it raises taxes in some form or other.
  • Interest Rates: In an emerging economy like India, a higher fiscal deficit leaves little room for interest rate cuts. A higher interest rate may affect private investments from taking off in a growing economy like India.
  • Foreign Dependence: Government may have to depend on external borrowings, which raises its dependence on other countries. Further, high fiscal deficit affects India’s Sovereign rating and hurts the confidence of foreign investors, which also raises the costs of borrowings.
  • Affects Private sector investment: More than average borrowing by the government from the market leaves that much less pool for private sector to borrow, stalling its growth plans. The fiscal deficit is detrimental for the economy if it is used just to cover revenue deficit. However, fiscal deficit may also have a positive effect on an economy, if it creates new capital assets, which increases productive capacity and generates future income stream.

 

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