FISCAL DEFICIT AND GOVERNMENT DEFICIT

1. Background

• A deficit is an amount by which the expenditures in a budget exceed the income. 
• A Government Deficit is the amount of money in the set budget by which the government expenditure exceeds the government income amount. 
• This deficit provides an indication of the financial health of the economy. 
• To reduce the deficit or the gap between the expenditures and income, the government may cut back on certain expenditures and also increase revenue-generating activities.

2. Types of Government Deficit

2.1 Revenue Deficit

• The shortfall between the total revenue received to the total revenue expenditure is revenue deficit.

• This deficit only includes current income and current expenses. A high value of deficit indicates that the government should cut down on its expenditures. The government may increase its revenue receipts by increasing tax income. Disinvestment which means selling off assets is another remedial measure to reduce revenue deficit.

2.2 Fiscal Deficit

• A fiscal deficit is a gap by which the government’s total expenditures exceed the government’s total generated revenue. This, however, does not include the government borrowings.

• Fiscal deficit indicates the amount of money that the government will need to borrow during the financial year. A greater deficit implies more borrowing by the government and the extent of the deficit indicates the amount of expense for which the money is borrowed.
• A huge disadvantage or implication of fiscal deficit is it may lead to a debt trap. Also, it may lead to unnecessary and wasteful expenditure by the government. Increased fiscal deficit leads to uncontrolled inflation. Borrowing is one way to reduce fiscal deficit. Another way is deficit financing.
• Deficit financing refers to the printing of new notes to increase cash flow in the system. The fiscal deficit is a positive outcome if it leads to the creation of assets. It is detrimental to the economic condition of the nation if it is used to simply cover revenue deficit.

2.3 Primary Deficit

A primary deficit is the amount of money that the government needs to borrow apart from the interest payments on the previously borrowed loans.

3. Current Account Deficit

• The current account represents a country's imports and exports of goods and services, payments made to foreign investors, and transfers such as foreign aid.
• The current account may be positive (a surplus) or negative (a deficit); positive means the country is a net exporter and negative means it is a net importer of goods and services.
• A country's current account balance, whether positive or negative, will be equal but opposite to its capital account balance.

4. Measures to Reduce Government Deficit

• Increased emphasis on tax-based revenues and appropriate measures to reduce tax evasion.
• Disinvestment should be done where assets are not being used effectively
• Reduction in subsidies by the government will also help reduce the deficit.
• Try and avoid unplanned expenditures.
• Borrowing from domestic sources.
• Borrowing from external sources.
• A broadened tax base may also help in reducing the government deficit.

5. The aspect of the Twin Deficit

• The finance ministry cautioned the re-emergence of the twin deficit problem in the economy, with higher commodity prices and rising subsidy burden leading to an increase in both fiscal deficit and current account deficit. 
• It’s also the first time the government has explicitly talked about the possibility of fiscal slippage in the current fiscal year
• “As government revenues take a hit following cuts in excise duties on diesel and petrol, upside risk to the budgeted level of gross fiscal deficit has emerged. 
• An increase in the fiscal deficit may cause the current account deficit to widen, compounding the effects of costlier imports, and weaken the value of the rupee, thereby further aggravating external imbalances, creating the risk (admittedly low, at this time) of a cycle of wider deficits and a weaker currency