What is fiscal deficit and how is it bridged by government? – The Financial Express–18.03.2018

Finance Minister Arun Jaitley revised the fiscal deficit target to 3.3 percent for FY19 of the GDP against 3 percent target set earlier after breaching the target for FY18. For the previous three years, Finance Minister Arun Jaitley has revised the fiscal target. The revised estimate for fiscal deficit for FY18 is 3.5 percent now as against 3.2 percent of the GDP set earlier. For those who find ‘fiscal deficit’ difficult to comprehend, here’s an easy explainer. Fiscal deficit is explained as a difference between total revenue and total expenditure of the government. Fiscal deficit indicates towards the total borrowing that a government requires. However, borrowings are not included when total revenue is calculated. It is usually expressed in terms of gross domestic product (GDP). In FY17, deficit was recorded at Rs 5 lakh crore. Fiscal deficit occurs either due to a substantial increase in capital expenditure or revenue deficit.

How government bridges fiscal deficit

A government in India follows these two ways to bridge the fiscal deficit. It either issues T-bills or bonds which are bought by financial institutions and banks. T-bills or Treasury bills are short-term borrowing financial instruments issued by the government with generally less than one-year of time period. The government funds it unplanned expenses which are not part of budget to raise money from capital market. The government pays the face value at the time of their maturity. The bills don’t offer any interest and sold at a discount to their face value. For instance, a 91 day T-bill of Rs 100 face value is issued at Rs 97.50 will give an investor Rs 100 on being redeemed at maturity offering him Rs 2.50 of profit.

A government also borrows issuing bonds when it needs money to fund big projects or to bridge substantial deficits. Bonds can also be traded in the market and also offer interest to the investors.

via What is fiscal deficit and how is it bridged by government? – The Financial Express

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