What can be the reasons for widening fiscal deficit of a country? While throwing light upon reasons of recent "fiscal slippage", discuss its possible consequences on economy.

Published: January 3, 2018

Fiscal deficit is defined as the gap between the government’s revenue receipts and it’s expenditure. Fiscal deficit to some extent is tolerable. The Fiscal discipline rules are given by N.K.Singh committee which recommended a fiscal deficit of 3% for the year 2017 with a maximum deviation of .5%.
The government fixes a budget for the fiscal deficit every financial year march to march. The current year’s fiscal deficit has reached an alarming rate of 112% of the total budget in November itself. It was 85.8% in 2016. With few more months to go, the government announced that it would make an additional borrowing of Rs.50,000 crore. This would lead to a fiscal slippage.
The reasons behind this situation is as follows:

  • The government’s expenditure till November is 68.9% of the total which is well within the permissible level.
  • Revenue receipts is the culprit with only 53% of the total received till November.
  • Non- tax revenue receipts are only a meagre 36.5% of the total as against the 54.2% of the previous year. This has majorly affected the revenue receipts of the country.
  • The major structural reform of GST caused the deviation in the revenue receipts. The receipts under GST still remain uncertain

The more the fiscal deficit, the more the country needs to borrow. more the borrowing, more is the slippage. This will affect the country with fall in bond prices, higher interest rates,etc. The announcement of Rs. 50.000 additional borrowing, the bond price fell to nearly 17 month low increasing it’s yield by 17 basis points. Higher fiscal deficit will also lead to crowding out of private sector. 
More fiscal deficit implies more borrowing which in turn means more debt. A country should not be in a position where its interest payments decides the amount to be spent on social sector schemes, Internal security requirements and defence expenditures. Thus a smaller fiscal deficit is favourable.

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