Fiscal deficit

Also called: Gross fiscal deficit, GFD · Topic: Government Budget, Fiscal Policy and FRBM · NCERT: Class 12, Ch 5 "Government Budget and the Economy"

Meaning

Fiscal deficit (FD) is how much the government's total spending in a year is more than the money it gets without borrowing. The formula is:

FD = Total expenditure − (Revenue receipts + Non-debt creating capital receipts)

• FD shows how much the government must borrow in the year, from all sources. That is why it is the key measure of the government's financial health.
• It is also called Gross fiscal deficit (GFD).

Explanation

How it works: the parts of the formula

• Total expenditure = revenue expenditure + capital expenditure.
• Revenue expenditure is spending that creates no asset, such as salaries, interest, subsidies and pensions.

• Capital expenditure (capex) is spending that creates assets, such as roads and railways.

• Revenue receipts are income that creates no liability (no duty to pay back). Examples are taxes and non-tax income such as dividends and fees.

• Non-debt creating capital receipts (NDCR) are capital receipts that the government never has to repay:
• Recovery of loans: money coming back from loans the government gave earlier.

• Disinvestment: selling government shares in public sector undertakings (PSUs, companies the government owns).

• Borrowing is left out of the receipts on purpose. Borrowing is what fills the gap, so it cannot also be counted as income.

• Legal definition (FRBM Act, 2003): FD is the amount by which total spending from the Consolidated Fund of India (the government's main account) is more than total receipts into it during a financial year. Debt repayment is left out of the spending side, and debt receipts are left out of the receipts side [4].

Another way to write it: FD and the other deficits

• FD = Revenue deficit (RD) + Capital expenditure − NDCR
• Revenue deficit (RD) = revenue expenditure − revenue receipts.

• So RD is one part of FD. The rest of FD is borrowing used for capex.

• Primary deficit (PD) = FD − Interest payments (this is the Budget practice; NCERT subtracts net interest liabilities).

• Interest is the cost of past borrowing. So FD includes the burden of old debt, and PD shows only this year's gap.

Worked example (NCERT Table 5.1, Central Government, % of GDP)

NCERT labels the table "2024-25 (P.A.)", but its values match the 2023-24 actuals.

Item	% of GDP
Revenue receipts	9.2
+ Recovery of loans	0.1
+ Other receipts (mainly disinvestment)	0.1
= Non-debt receipts	9.4
Total expenditure (11.8 revenue + 3.2 capital)	15.0
Fiscal deficit (15.0 − 9.4)	5.6

• Check 1: RD 2.6 + capex 3.2 − NDCR 0.2 = 5.6.
• Check 2: Borrowings and other liabilities in the same table = 5.6. This proves that FD = total borrowing requirement.
• Primary deficit: 5.6 − interest 3.6 = 2.0.

What makes FD rise or fall

• FD rises when:
• spending goes up, for example through more subsidies, higher interest bills or a big capex push.
• tax revenue falls, for example in a slowdown or a crisis such as COVID (FD hit 9.2% of GDP in 2020-21).

• disinvestment or loan recovery is lower than planned.

• FD falls when:

• tax collection improves.
• disinvestment receipts rise.

• wasteful revenue spending is cut.

• Trap: disinvestment lowers the FD figure, but it is a one-time sale of assets. It does not fix the gap between regular income and regular spending.

In India

• Constitutional base: Article 112 requires the President to place the Annual Financial Statement (the Union Budget) before Parliament every year. FD is worked out from the receipts and expenditure shown in it.
• Law: the FRBM Act, 2003 (Fiscal Responsibility and Budget Management Act) defines FD [4]. Its original goal was to bring FD down to 3% of GDP by March 2008 [5].
• How FD replaced "budget deficit":
• The old budget deficit counted borrowing as a receipt. Whatever gap was left was filled by the RBI through ad hoc Treasury Bills, which in effect meant printing money.
• The RBI and the government signed an agreement on 9 September 1994 to phase these out [6].
• From 1 April 1997, Ways and Means Advances (WMA) replaced them. WMA are short-term RBI loans that the government must repay within set limits [6].

• Budget deficit was discontinued from 1997-98. FD became the main measure.

• Latest figures (Centre, % of GDP):

Year	FD	Note
2020-21	9.2	COVID peak
2023-24	5.6	Actuals
2024-25	4.8	Actuals
2025-26	4.4	RE; the glide-path target of below 4.5% was met [2][3]
2026-27	4.3	BE [2]

• 2026-27 BE in rupees:
• Expenditure is ₹53.5 lakh crore and non-debt receipts are ₹36.5 lakh crore [2][3].

• So FD ≈ ₹17.0 lakh crore, which is 4.3% of GDP [2].

• How the FD is financed (2026-27 BE):

• Net market borrowing through dated securities (long-term government bonds) is ₹11.7 lakh crore. Gross market borrowing is ₹17.2 lakh crore [2].

• The rest comes from small savings, other liabilities and drawing down cash.

• New anchor is debt, not FD:

• The Centre aims to bring its debt to about 50 ± 1% of GDP by 2030-31 (March 2031) [3][7].
• Debt is 56.1% of GDP (2025-26 RE) and 55.6% (2026-27 BE) [2].

Don't confuse with

• Revenue deficit: revenue expenditure − revenue receipts. It shows only borrowing used for consumption. It is one part of FD, and FD also includes borrowing for capex.
• Primary deficit: FD − interest payments. It removes the cost of past debt. PD = 0 means the government borrows only to pay interest on old loans.
• Budget deficit (old measure): total expenditure − total receipts, with borrowing counted as a receipt. It was dropped from 1997-98. FD leaves borrowing out, so FD equals the borrowing itself.
• Effective revenue deficit: RD − grants for creation of capital assets. It is a finer measure of consumption borrowing. It was introduced in Budget 2011-12 and made an FRBM target in 2012. It is not a measure of total borrowing.

Prelims Hooks

• FD = Total expenditure − (Revenue receipts + Recovery of loans + Disinvestment). This equals the government's total borrowing requirement from all sources.
• FD = RD + Capex − NDCR. RD can be larger than FD only if capex is below NDCR.
• Trap: disinvestment and recovery of loans are capital receipts but non-debt, so they reduce FD. Borrowing is also a capital receipt, but it is the FD.
• The FRBM Act, 2003 defines FD using the Consolidated Fund of India, leaving out debt repayment and debt receipts [4].
• 2026-27 BE: FD 4.3%, RD 1.5%, debt 55.6% of GDP [2][3]. FD peaked at 9.2% in 2020-21.
• FD replaced "budget deficit" as the main measure after WMA replaced ad hoc T-bills from 1 April 1997 [6].

Mains Points

• The quality of FD matters, not just its size:
• The RD/FD ratio shows what share of borrowing pays for consumption. When it rises, the quality of government spending is getting worse (NCERT).
• RD/FD was about 46% in 2023-24 (2.6/5.6). It is about 35% in 2026-27 BE (1.5/4.3, calculated from [3]). So more of today's borrowing funds assets.

• Public capex is budgeted to rise from ₹11.2 lakh crore to ₹12.2 lakh crore in 2026-27 [3]. Borrowing for roads can pay for itself through future growth. Borrowing for subsidies cannot.

• High FD → interest burden → crowding out:

• Debt piles up: a high FD adds to debt every year.
• Interest eats income: interest is 40% of revenue receipts and 26% of total expenditure in 2026-27 BE [3]. Interest, salaries and pensions cannot be cut, so capex and welfare get squeezed.

• Private firms pay more to borrow: heavy government borrowing pushes up bond interest rates. Companies then find it costlier to borrow and invest.

• From a deficit target to a debt target (50 ± 1% by 2031) [3][7]:

• For: it gives room to spend in bad years, as in 2020-21, when FD hit 9.2%. A falling debt ratio also frees money from interest for priority spending [2].
• Against: critics say it weakens year-by-year discipline. The debt ratio also depends on nominal GDP growth, which the government does not fully control.
• Link to monetary policy: since 1997, FD has not been financed by printing money. This separation made the RBI's later inflation targeting possible and believable.

Related concepts

• Balanced budget
• Surplus budget
• Budget deficit
• Revenue deficit
• Effective revenue deficit
• Primary deficit
• Net interest liabilities
• Government dissaving
• Quality of government expenditure

Read more

• Measuring the gap: balanced, surplus and deficit budgets