What Is Fiscal Deficit And Its Role In Budget Planning?

When the Union Budget is presented, the Finance Minister emphasizes India’s fiscal deficit among other important budget factors.

In the Interim Budget 2024 on Thursday (February 1, 2024), Finance Minister Nirmala Sitharaman revised the fiscal deficit target for the current financial year.

In this write-up, we will explain what a fiscal deficit is, and how it impacts the national economy and the common man.

How Does Fiscal Deficit Impact the Economy and Common Man?

Interest Rates: When the government borrows money to cover the deficit, it increases the demand for credit in the economy. This can lead to higher interest rates, making it more expensive for individuals and businesses to borrow money. Higher interest rates can also reduce investment and economic growth, affecting the common man.

Inflation: Increased government spending raises the money supply in the economy, which can lead to inflation. More money chasing the same amount of goods and services drives up prices, reducing the purchasing power of the common man.

Exchange Rates: Borrowing money to finance the deficit increases the demand for foreign currency, which can cause the domestic currency to depreciate. A weaker currency makes imports more expensive, further contributing to inflation and affecting the cost of goods for the common man.

In conclusion, fiscal deficit has both positive and negative impacts on the economy and the common man. While it can help finance government expenditure and stimulate economic growth, it can also lead to higher interest rates, inflation, and a weaker domestic currency. Governments must manage fiscal deficits carefully to balance spending and revenue generation, ensuring a stable and sustainable economy for the common man.