Every year during budget session we hear this term Fiscal Deficit, it trends over social media and news channels for a week or month. But its impact stays on us all year in the form of taxes, interest rates, government schemes and even through jobs.
What Is Fiscal Deficit?
Fiscal deficit refers to the gap between what the government earns through taxes and other sources and what it spends on salaries, schemes, and development activities in a year. When government income is less than its total expenditure, the shortfall is known as fiscal deficit.
Fiscal deficit represents the amount of money the government needs to borrow to run the country.
Basically, governments do not shut down operations when income falls short. Instead, they borrow money to fund essential services like defense, infrastructure, welfare schemes, and administration.
Fiscal Deficit Meaning
To understand fiscal deficit meaning clearly, think of the government as a very large household.
Government Income vs Spending
- Income: Taxes (income tax, GST, corporate tax), dividends from public companies, fees, fines
- Spending: Salaries, pensions, subsidies, infrastructure projects, defense, welfare schemes
When the spending is more than income then borrowing becomes necessary.
Household Analogy
Imagine a household earns ₹50,000 per month but spends ₹60,000.
- Monthly income: ₹50,000
- Monthly expenses: ₹60,000
- Shortfall: ₹10,000
That ₹10,000 is covered by
- Credit cards
- Personal loans
- Borrowing from friends
For the government, this shortfall is called fiscal deficit and it is funded by issuing bonds or borrowing from institutions.
Fiscal Deficit Formula
Fiscal Deficit = Total Government Expenditure – Total Revenue
Total Government Expenditure Includes
- Salaries of government employees
- Defense spending
- Infrastructure projects (roads, railways, ports)
- Subsidies (food, fuel, fertilizer)
- Interest payments on past loans
Total Revenue Includes
- Tax revenue (GST, income tax, corporate tax, customs duty)
- Non-tax revenue (dividends, fees, spectrum auctions)
Borrowings are excluded because after calculating fiscal deficit it gets clear how much borrowing is required.
This formula helps the policymakers to measure how dependent the government is on borrowed money.
How to Calculate Fiscal Deficit
To understand fiscal deficit and how to calculate let us see an example.
Suppose in a financial year
- Government expenditure = ₹30 lakh crore
- Government revenue (excluding borrowings) = ₹22 lakh crore
Step 1: Identify spending
₹30 lakh crore
Step 2: Identify revenue
₹22 lakh crore
Step 3: Apply formula
Fiscal Deficit = 30 – 22
Fiscal Deficit = ₹8 lakh crore
This means the government needs to borrow ₹8 lakh crore to meet its expenses and successfully run the government for that year. This calculation helps investors, economists, and credit rating agencies assess the government’s financial health.
What Is Fiscal Deficit of India?
The fiscal deficit of India refers to how much the Indian government borrows every year to manage its expenses beyond its income. Instead of focusing on absolute numbers, Indian government usually presents fiscal deficit as a percentage of GDP.
Why GDP Percentage Matters
- GDP shows the size of the economy
- A ₹5 lakh crore deficit means different for a small economy vs a large one
- Percentage allows fair comparison over time
India’s fiscal deficit target for FY 2025-26 is set at 4.4% of GDP, or approximately ₹15.7 trillion, which was 4.8% of GDP in FY25, with significant spending on infrastructure.
Role of the Union Budget
Every year
- The government estimates revenue and spending
- Fiscal deficit target is announced in the Union Budget
- Actual deficit may vary due to economic conditions
India aims to gradually reduce fiscal deficit during stable growth periods while allowing higher deficits during crises.
Why Does India Have a Fiscal Deficit?
India’s fiscal deficit is not accidental. It exists due to structural and developmental needs as India is a developing nation.
1. Welfare Spending
India runs large welfare programs
- Food subsidies
- Rural employment schemes
- Health and education support
These welfare schemes improve living standards but increase expenditure of government.
2. Infrastructure Development
Roads, railways, airports, digital infrastructure all require heavy spending from the starting of the project, while returns come slowly over decades.
3. Subsidies
Fuel, fertilizer, and food subsidies helps the government to control inflation and support farmers and poor households, but these subsidies increases the fiscal deficit.
4. Economic Slowdown
During slowdowns
- Tax collections fall
- Welfare spending rises
- Government borrows more to stimulate growth
Fiscal deficit often increases during difficult economic phases since it gets very important for the government to manage the crises politically.
Is Fiscal Deficit Good or Bad?
Fiscal deficit is neither good nor bad Its depends on how much is the deficit and how the borrowed money is used.
When Fiscal Deficit Is Useful
- During recessions to boost demand
- For long-term infrastructure creation
- To protect vulnerable populations
- To revive job creation
If used wisely fiscal deficit acts like economic medicine.
When Fiscal Deficit Becomes Dangerous
- When borrowed funds are used in daily expenses only
- When interest amount becomes huge and are increasing
- When investors lose confidence
- When inflation rises uncontrollably
Sustained high deficits can weaken a country’s financial stability.
How Fiscal Deficit Affects Economy, Businesses & People
Fiscal deficit is not only a government number it indirectly affects daily life of common man.
Inflation
High fiscal deficit can increase money supply, pushing prices up.
Interest Rates
More government borrowing increases demand for funds, which can raise interest rates for
- Home loans
- Business loans
- Personal credit
Taxes
To control deficit governments may
- Increase taxes
- Reduce exemptions
Jobs and Growth
If deficit spending is used productively
- It creates jobs
- Private investment improves
- Economic growth strengthens
Poorly managed deficit will loose investors trust on government.
Fiscal Deficit vs Revenue Deficit vs Current Account Deficit
These terms sound similar but measure different imbalances.
| Type of Deficit | Meaning | Area |
| Fiscal Deficit | Spending exceeds income | Government finances |
| Revenue Deficit | Revenue expenditure exceeds revenue receipts | Budget quality |
| Current Account Deficit | Imports exceed exports | External trade |
Understanding this difference helps avoid confusion during economic discussions.
Summary
- Fiscal deficit shows how much the government borrows in a year
- It occurs when spending exceeds income
- India reports fiscal deficit as a percentage of GDP
- Deficit can support growth if used wisely
- Excessive deficit can cause inflation and high interest rates