What is Fiscal Deficit?
Fiscal Deficit occurs when the Union Government’s total spending exceeds its tax and non-tax income in a given financial year. The gap is financed primarily through government bond issuances (borrowing from the market).
Formula
$$\text{Fiscal Deficit} = \text{Total Government Expenditure} - (\text{Total Revenue Receipts} + \text{Non-debt Capital Receipts})$$
Significance for Financial Markets
- Target Benchmark: In India, fiscal deficit is expressed as a percentage of GDP (target ~4.5% to 5.1%).
- Impact on Interest Rates: High fiscal deficits increase government market borrowings, pushing up bond yields and commercial interest rates across the economy.