Economy

Budget 2019: What does fiscal deficit mean?

Updated : January 28, 2019 11:13 AM IST

The goal of planning a budget is to balance the earnings and expenditures.

The concept is similar to when an individual is framing their own Budget for the month with his or her income.

The Interim Budget is scheduled to be announced on February 1.

The Budget framework of every country is typically a document which estimates how much the government will earn and how much it will spend on developing various sectors.

The goal of planning a budget is to balance the earnings and expenditures.

However, many a time, the estimated expenditures or the total spending exceed the earnings or the revenue. The difference between the two is called a fiscal deficit.

Conversely, if the revenue exceeds the expenditure, the difference is called a fiscal surplus.

The concept is similar to when an individual is framing their own budget for the month with his or her income.

The difference between a deficit and a fiscal deficit is that the latter is also a measurement of the total borrowing that the government needs for the financial year.

The Indian fiscal deficit is expressed in terms of the percentage of the gross domestic product (GDP) and is the difference between the expenditure and revenue of the government, i.e., the deficit in FY 2017-18 is Rs 5 lakh crore. The same can be expressed in the percentage by calculating the percentage difference, i.e, 3.5 percent.

Two methods, issuing treasury bills or T-bills and bonds, are used by the government to fill up the deficit gap. The treasury bills and bonds are mainly bought by financial institutions.

T-bills are short-term debt instruments issued by the government, normally for less than a year. For example, if the centre requires funds for a major infrastructure plan or elections, even, the government can issue treasury bills or T-bills to borrow money from the capital market.

The bills do not pay any interest but are sold at a discount to their face value. When the bill matures, the centre has to pay the face value.

For example, a 91 day T-bill of Rs 100 face value is issued at say Rs 98.20. After the bill matures, the investor can get a profit of Rs 1.80 for redeeming the bill of Rs 100.

The second method, bonds, are long-term debt instruments, issued for more than a year. The centre issues bonds to usually bridge massive deficits and finance projects. The debt instrument pays interest to the investors and it is traded in the market.

The Interim Budget is scheduled to be announced on February 1.

Budget 2019: What does fiscal deficit mean?

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