Fiscal Deficit

Investments

Fiscal deficit is the gap between government's total expenditure and total revenue (excluding borrowings). It is expressed as a percentage of GDP. Government must borrow to fill this gap -- this borrowing impacts interest rates, inflation, and equity markets.

In detail

India fiscal deficit targets:nFY 2024-25 target: 5.1% of GDPnFY 2025-26 target: 4.5% of GDPnFRBM (Fiscal Responsibility and Budget Management Act) target: 3% of GDP long-termnnFiscal deficit implications:nHigh deficit: government borrows more, pushing up interest rates (crowds out private investment)nHigh deficit: inflationary if RBI monetises the debtnLow deficit: more fiscal space, lower interest rates, positive for equity marketsnnFor investors: fiscal deficit announcements in Union Budget affect bond yields immediately and equity markets over time.

Formula

Fiscal deficit = Total government expenditure - Total revenue receipts (excluding borrowings)nAs % of GDP = Fiscal deficit / GDP x 100

Real-life example

🇮🇳 India example

When India announced Rs 9.3L Cr fiscal deficit in Budget (5.9% of GDP) for FY 2022-23: 10-year G-Sec yield rose from 6.8% to 7.3% in the following weeks as markets expected more government borrowing. FD rates and home loan rates followed upward over the next 6 months.

Frequently asked questions

Is a fiscal deficit always bad? ▼

Not always. Productive fiscal deficit (spending on infrastructure, education, healthcare) multiplies economic activity and eventually increases tax revenue. Unproductive deficit (subsidies, interest payments) is more concerning. India's infrastructure-focused fiscal expansion has been viewed positively by markets.