Question

What is meant by fiscal deficit? how is the fiscal deficit of the govt financed?

Answer 1

Dear Student,

Fiscal Deficit is the excess of Total expenditure (Revenue + Capital) over Total receipts (Revenue + capital other than borrowings).
It occurs when the government spends more than its income leading to the borrowings. Thus ,The government finances the fiscal deficit by Borrowings.
That borrowings can be from three sources that are
Borrowing from RBI - It is done by issuing new notes to the government against government securities.
Borrowing from abroad is in the form of loans from foreign countries,international organisations like IMF and World Bank.
Borrowing from the home country is done by issuing government securities like treasury bills to the public. The buyers are financial institutions,banks, insurance companies,pension funds,investment funds and also some private savers.
In this way the total borrowing requirements of the government in a financial year is equal to fiscal deficit in that year.

​​​​​​Regards.