What is fiscal consolidation and why is it essential?

It was announced by Nirmala Sitharaman, the Union Finance Minister of India that the fiscal deficit will be reduced to 5.1 percent of GDP by the Centre in the year 2024-25. 

Moreover, the Union Finance Minister also said that the fiscal deficit would be trimmed to 4.5 percent of the Gross Domestic Product by the year 2025-26. This projection was enough to surprise experts. What exactly is fiscal deficit? Let's understand. 

Understanding Fiscal Deficit

Fiscal deficit is actually the shortfall in the revenue of the government in comparison with its expenditure. In case the revenues of the government are actually lower than its expenditures, the government sells its assets or borrows money to fund the resultant deficit. The estimates for the year 2024-25 say that while the total expenditure of the government would be Rs. 47.66 lakh crore by estimation, the total revenue is estimated to be Rs. 30.8 lakh crore and the tax receipts of the government are expected to be Rs. 26.02. 

Is fiscal deficit the same as national debt?
No. Fiscal deficit and national debt are two different concepts. The national debt is actually the complete amount of money that a country's government owes its lenders at a specific point in time. It is the amount of debt that has been accumulated by a government over years of running fiscal deficits and then borrowing funds in order to deal with them. 

Why is the fiscal deficit important?

Well, there are several reasons for which fiscal deficits matter. A high fiscal deficit of a country leads to inflation in the country. This is because to bridge the fiscal deficit, the country will then be required to use fresh capital issued by the central bank. 

Additionally, the fiscal deficit also indicates the fiscal discipline of a particular government. 

How are fiscal deficits fund? 

To fund the fiscal deficits, bond market is where the government usually borrows money from. Here, the lenders lend to the government in exchange of government issued bonds.