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Budget 2016: What is fiscal deficit? Will govt meet this crucial target?

Fiscal deficit is one of the most closely watched numbers in the Budget. It is the shortfall in the government's revenues to meet its expenditure. The government bridges the gap through market borrowings.



The budget gives out the revised estimate of the deficit for the previous financial year and also the estimate for the next. The number is expressed both in absolute terms and as a percent of GDP.

The importance of the number is that it gives an indication as to how the government is managing its expenses. The smaller the number, the better. So, the government's endeavour should ideally be to bring the deficit under manageable levels.

A higher fiscal deficit means the government will borrow more from the market through issuance of government securities. This would, in turn, result in higher interest payout from the government. Thus a higher fiscal deficit reveals the financial weakness of the government.

For the current financial year, the government has set a deficit target of 3.9 percent. The wide expectation is that finance minister Arun Jaitley will meet the target.

Media reports have said that in order to meet the target the government is holding back expenditure and thus had huge cash balance with the Reserve Bank of India. According to a report in the Business Standard, as of 28 January the balance stood at Rs 1.4 lakh crore which it termed is "an amount unusually high for this time of the financial year".

The lack of government spending also resulted in acute liquidity pressure in the banking system.

The government, however, has no other options, given the RBI's insistance on "a commitment to fiscal rectitude".

"Structural reforms in the forthcoming Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth, while also ensuring that inflation remains on the projected path of 5 percent by the end of 2016-17," the policy statement had said.

Updated Date: Feb 29, 2016 08:25 AM

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