Topic: Fiscal Deficit and

Macroeconomic Factors
 • Fiscal deficit refers to the shortfall in a government’s
revenue when compared to its expenditure.
• When a government’s expenditure exceeds its revenues, the
government will have to borrow money or sell assets to fund the

FISCAL deficit.
• It is an indicator of the extent to which the government must

DEFICIT borrow in order to finance its operations and is expressed as a

percentage of the country's GDP.
• Taxes are the most important source of revenue for any
government. In 2024-25, the government’s tax receipts are
expected to be Rs 26.02 lakh crore while its total revenue is
estimated to be Rs 30.8 lakh crore.
• When a government runs a fiscal surplus, on the other hand, its
revenues exceed expenditure.
 Positive Aspects of Fiscal Deficit:

• Increased Government Spending: Fiscal deficit enables the

government to increase spending on public services, infrastructure,
and other important areas that can stimulate economic growth.

FISCAL • Finances Public Investments: The government can finance long-

term investments, such as infrastructure projects, through fiscal

DEFICIT deficit.

• Job Creation: Increased government spending can lead to job

creation, which can help reduce unemployment and increase the
standard of living.
 Negative Aspects of Fiscal Deficit:

• Increased Debt Burden: A persistent high fiscal deficit leads to an increase

in government debt, which puts pressure on future generations to repay
the debt.

• Inflationary Pressure: Large fiscal deficits can lead to an increase in money

supply and higher inflation, which reduces the purchasing power of the

FISCAL general public.

DEFICIT
• Crowding out of Private Investment: The government may have to borrow
heavily to finance the fiscal deficit, which can lead to a rise in interest
rates, and make it difficult for the private sector to access credit, thus
crowding out private investment.

• Balance of Payments Problems: If a country is running large fiscal deficits,

it may have to borrow from foreign sources, which can lead to a decrease
in foreign exchange reserves and put pressure on the balance of
payments.
 • Fiscal Responsibility and Budget Management (FRBM)
Framework:

• The FRBM Act, instituted in 2003, set ambitious targets for

debt reduction, aiming to limit the general government debt
to 60% of GDP by 2024-25.

FISCAL • However, subsequent fiscal trajectories deviated from these

targets, with the Centre's outstanding debt surpassing the
DEFICIT originally envisioned thresholds.

• FRBM Review Committee Report has recommended a debt

to GDP ratio of 60% for the general (combined)
government by 2023, comprising 40% for the Central
Government and 20% for the State Governments.
  There is a strong direct relationship between the government’s fiscal
deficit and Inflation in the country.

FISCAL  When a country’s government runs a persistently high fiscal deficit,

DEFICIT this can eventually lead to higher inflation as the government will
be forced to use fresh money issued by the central bank to fund its
AND fiscal deficit.

INFLATION  The fiscal deficit in 2020 reached a high of 9.17% of GDP during the
pandemic. It has since decreased significantly and is expected to
reach 5.8% in 2023-24.
  A fiscal deficit can stimulate GDP growth in the short term if the
borrowed funds are used for productive investments, such as
infrastructure, education, or technology.
FISCAL DEFICIT  Conversely, a large fiscal deficit can lead to higher interest rates if
the government competes with the private sector for borrowing.
AND  Persistent high deficits can lead to a large national debt. If
GROWTH OF investors doubt the government's ability to repay, it can result in
higher borrowing costs and lower confidence, negatively
GDP impacting economic growth.
 In times of economic downturn, a fiscal deficit can help boost
demand and GDP growth by increasing government spending or
cutting taxes, supporting consumption and investment.
 • The National Debt is the total amount of money that the
government of a country owes its lenders at a particular point in
time.
• Government debt encompasses various liabilities, including
FISCAL domestic and external loans, alongside obligations to schemes
such as small savings, provident funds, and special securities.
DEFICIT • These liabilities entail both interest payments and repayment of
AND principal amounts, imposing a considerable financial burden on
the government's finances.
NATIONAL • It is usually the amount of debt that a government has
DEBT accumulated over many years of running fiscal deficits and
borrowing to bridge the deficits.
• The higher a government’s fiscal deficit as a share of GDP, the less
likely its lenders will be paid back without trouble.
 • It refers to the total amount of money that a government owes to
external creditors and internal creditors within the country.
• This includes borrowing by all levels of government (central, state,
and local) and might also include debt owed by government
FISCAL agencies and public corporations.

DEFICIT • A high fiscal deficit can also adversely affect the ability of the
government to manage its overall public debt.
AND • In December 2023, the IMF warned that India’s public debt could
PUBLIC DEBT rise to more than 100% of GDP in the medium term due to risks.
• A lower fiscal deficit may help the government to more easily sell
its bonds overseas and access cheaper credit from the
international bond market.
 In conclusion, the fiscal deficit is a critical aspect of a country's
macroeconomic environment. While it can have positive effects
such as increased government spending and job creation, it also has
negative implications like increased debt burden, inflationary
pressure, and crowding out of private investment. The Fiscal
Responsibility and Budget Management (FRBM) Framework aims to
manage these risks by setting targets for debt reduction. The
CONCLUSION relationship between fiscal deficit and inflation is direct, and
persistent high deficits can lead to higher interest rates and lower
economic growth. Therefore, it is essential for governments to
balance their budgets and manage their debt effectively to ensure
long-term economic stability.
Thank you!