Union Budget 2025: What is fiscal deficit and how does it impact India’s economy

Finance Minister Nirmala Sitharaman will soon present the Union Budget for 2025 on February 1 marking her eighth consecutive budget presentation Under PM Modis leadership Indiarsquos tax system has been evolving with regular updates and this year promises to bring further changes to the tax regime What is Fiscal Deficit Understanding its meaning significance and how it impacts Indias economic growthImagine if you spent more money than you earned every month If the extra spending is for longterm goals like buying a house or investing in your future it can be worthwhile But if the extra spending is for things you dont really need it can lead to financial trouble Similarly a fiscal deficit occurs when the government spends more money than it generatesFor the fiscal year 202425 Indias fiscal deficit is estimated to be Rs 1613 lakh crore which is about 49 percent of the countrys GDP While that figure might sound concerning letrsquos break it down further to understand what it truly meansThe fiscal deficit is essentially the gap between what the government spends and what it earns excluding borrowed funds A moderate fiscal deficit is often seen as a way to fund development initiatives like infrastructure healthcare and education which ultimately benefit the economy However if the deficit grows too large it can lead to increased debt inflation and economic instabilityBreaking down the fiscal deficitTo get a clearer picture letrsquos look at some key elements that contribute to the fiscal deficitRevenue deficit This happens when the governments daily expenses such as salaries pensions and subsidies exceed its income For the 202425 financial year the revenue deficit is projected to be around 18 percent of GDPPrimary deficit This is the fiscal deficit minus interest payments on debt It helps show how much the government is borrowing purely for new expenses rather than for servicing old debtsEffective revenue deficit This measure takes into account the revenue deficit while adjusting for grants used for capital spending It offers a more accurate look at the governmentrsquos operational financial healthHow does the government finance the fiscal deficitWhen government spending outpaces its income it turns to various ways of raising fundsMarket borrowings The government issues bonds that investors purchase effectively lending money to the governmentSmall savings and provident funds These include schemes like the Public Provident Fund PPF and National Savings Certificates NSC where the government borrows from the general publicForeign loans The government may also seek loans from international bodies like the World Bank or borrow from global markets by issuing bondsA historical perspective The 1991 crisisBack in 1991 Indias fiscal deficit was alarmingly high crossing 8 percent of GDP which led to a severe financial crisis The country struggled with a balance of payments crisis foreign exchange reserves dwindled and the government was forced to pledge gold to secure foreign loans This crisis prompted India to adopt a more disciplined approach to fiscal management and reformsHow to understand fiscal deficitWhile the fiscal deficit number alone might sound alarming its true impact depends on the contextTrends over time Is the fiscal deficit rising or falling A slight decrease in 202425 is a sign that the government is working to rein in its borrowingGlobal comparisons While developed countries might manage higher deficits emerging economies like India must manage their fiscal deficits carefully to ensure longterm economic stabilitySmart spending Borrowing for growthdriving projects like infrastructure or education is generally seen as a good use of funds But borrowing to cover routine spending can become problematicBalancing growth and stabilityManaging the fiscal deficit is like balancing a budget at home The goal is not to eliminate the deficit completely but to keep it under control The government can reduce its reliance on borrowing by making smarter spending choices expanding the tax base and attracting private investmentsIf the fiscal deficit is handled well it can support economic growth without creating too much debt But if its not managed properly it can result in a shaky economy In the coming years how India manages its fiscal deficit will play a key role in shaping the countryrsquos economic future

Union Budget 2025: What is fiscal deficit and how does it impact India’s economy

What is Fiscal Deficit? Understanding its meaning, significance, and how it impacts India's economic growth

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Home / News / India News / Article / Union Budget 2025: What is fiscal deficit and how does it impact India’s economy

Union Budget 2025: What is fiscal deficit and how does it impact India’s economy

What is Fiscal Deficit? Understanding its meaning, significance, and how it impacts India's economic growth

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Latest Photos

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Mid-Day Fast