In simple terms, a fiscal deficit is when a government’s total expenditures exceed the revenue it generates (excluding money it borrows). Think of it like a personal budget: if you earn $50,000 a year but spend $60,000, your personal “fiscal deficit” is $10,000. To cover that gap, you either dip into savings or take out a loan.
For a nation, scale is much larger, but logic remains same. Fiscal deficit is a critical barometer of a country’s financial health and its dependence on debt.
How is Fiscal Deficit Calculated?
To understand deficit, we look at difference between what goes out and what comes in.
Standard formula is:
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Total Expenditure: Includes Revenue Expenditure (salaries, pensions, interest on old debt) and Capital Expenditure (investments in infrastructure like roads, schools, and hospitals).
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Revenue Receipts: Primarily taxes (GST, Income Tax, Corporate Tax) and non-tax revenue (dividends from public companies, fees).
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Non-debt Capital Receipts: Money coming in that doesn’t create future debt, such as the recovery of loans or proceeds from selling government-owned assets (disinvestment).
Is a Fiscal Deficit Always Bad?
A common misconception is that a deficit is a sign of failure. In reality, it depends on what money is being used for:
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Good Deficit: If a government borrows money to build high-speed rail, digital infrastructure, or power plants, it is creating assets that will boost productivity and generate revenue in long run. This is often seen as investing in the future.
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Bad Deficit: If borrowing is used primarily to pay for administrative costs, subsidies, or interest on previous loans without creating new assets, it can lead to a debt trap.
Major Impacts on Economy
When a government runs a high fiscal deficit over a long period, several things happen:
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Inflationary Pressure: If government borrows too much or prints more money to fund the deficit, it can lead to an increase in money supply, driving up prices of goods and services.
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Crowding Out Effect: When government borrows heavily from the domestic market, it competes with private businesses for same pool of funds. This can push up interest rates, making it more expensive for private companies to expand.
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Debt Burden on Future Generations: Today’s deficit is tomorrow’s debt. High interest payments on accumulated debt can eat up a significant portion of budget, leaving less money for healthcare and education in future.
Current Trends (2026 Context)
As of early 2026, many major economies—including India—are focused on fiscal consolidation. Following massive spending required during pandemic years, goal is now to bring deficits down to more sustainable levels.
| Metric (India Projection) | FY 2025-26 (Revised) | FY 2026-27 (Budgeted) |
| Fiscal Deficit (% of GDP) | 4.4% | 4.3% |
| Debt-to-GDP Ratio | 56.1% | 55.6% |
| Revenue Deficit | 1.5% | 1.5% |
Current strategy involves a glide path toward lower deficits while keeping Capital Expenditure (Capex) high to ensure that economic growth remains robust enough to outpace debt.