The term fiscal refers to matters that involve the government's income. It is important to remember that each time you hear this expression, it is referring to money coming into the government. Moreover, a deficit is a shortage.
A government runs a deficit when there is a shortfall between its annual revenues and expenditures, or fiscal deficit. It reveals how much a government needs to borrow to meet its annual expenditure needs. Government bonds, tax increases, or a reduction in foreign exchange reserves are all viable options for financing a fiscal deficit. Long-term government spending shortfalls can increase the national debt and fuel inflation fears.
Fiscal Deficit: What Drives It?
A government runs a deficit when its spending exceeds its income. There are several possible causes for this:
Government spending has been increased
If government revenue does not increase at the same rate as government spending, then the deficit will expand.
Reduced Income
A larger deficit may also result from a drop in revenue streams like tax collections or royalties from the sale of natural resources.
Crises in the economy
Government revenues may fall while spending rises during a recession, increasing the deficit.
Conflicts and Natural Disasters
The government may have to decrease expenditure to deal with the aftermath of a war or a natural disaster, adding to the deficit.
Aid Society
The deficit of a country might be expected to rise if it has numerous costly social welfare programs.
Debt Interest
Interest payments on government debt may be rather costly, adding even more pressure on already tight budgets.
How Does India's Government Deal with Its Budget Shortfall?
The Indian government controls the budget imbalance through raising taxes and reducing spending. In India, the budget deficit is controlled based on a number of factors, including:
Taxation
In order to bring in more money, the government raises taxes on a number of different products and services. More money coming into government coffers is a good thing for lowering the deficit.
Cost Management
In order to bring the budget deficit under control, the government reduces spending on a number of programs and initiatives. Subsidies might be reduced, and the amount of government workers could be let off.
Private-Public Partnerships
Public-private partnerships are encouraged by the government as a means to boost income and save costs. One way this is accomplished is through the privatization of governmental services and the financing of infrastructure projects by private enterprises.
Borrowing
The federal government also borrows money from private investors and foreign governments. Yet, this must be done responsibly to prevent falling into an unsustainable debt cycle.
Disinvestment
When the government needs cash, it sometimes "disinvests," or sells its stake in a public company. This can be accomplished through strategic sales or public stock offerings.
Fiscal Policy
By regulating the country's money supply, the Reserve Bank of India helps keep fiscal deficits in check. Inflation is kept in check and interest rates are kept low, both of which contribute to a smaller budget deficit.
