As Finance Minister Nirmala Sitharaman presents the Union Budget 2026–27 today, February 1, you are likely to hear many complex economic terms. One of the most important among them is the “fiscal deficit”.
What is a fiscal deficit?
In simple terms, a fiscal deficit happens when the government spends more money than it earns in a year. The government’s revenue receipts comprise taxes and other sources, while its spending includes salaries, welfare schemes, infrastructure projects, defence and interest payments.
This gap means the government has to borrow money to meet its expenses. It usually borrows from within the country or from foreign lenders. Because of this, the fiscal deficit is seen as an important indicator of the country’s financial health and economic stability.
The government is on course to achieve the fiscal deficit target of 4.4 per cent of GDP for the current financial year, according to broad trends highlighted in the Economic Survey 2025–26 tabled in Parliament on Thursday.
How is the fiscal deficit calculated?
Fiscal deficit is calculated as the difference between total government expenditure and total revenue, excluding borrowings. If this gap becomes too large, it can put pressure on the economy. A high fiscal deficit can lead to higher inflation, discourage private investment, reduce confidence in the economy, and increase the government’s overall debt.
Managing the fiscal deficit is important for steady and sustainable economic growth. Governments try to strike a balance by controlling spending, increasing revenues, or doing both, so that the economy remains stable in the long run.
The fiscal deficit can be shown in two ways: as an absolute amount or as a percentage of the country’s GDP. For example, if the government spends $1 trillion but earns only $900 billion, the fiscal deficit is $100 billion. If the country’s GDP is $10 trillion, this deficit can also be shown as 1% of GDP.
When does the fiscal deficit usually increase?
Fiscal deficits often rise when the government increases spending to support the economy, especially during slowdowns or recessions. While this can help boost growth in the short term, it usually leads to more borrowing and adds to national debt over time.
“The increase in STT on futures and options should be seen as a market-quality and risk-discipline measure, not a directional call on markets. While it incrementally raises transaction costs for high-frequency and ultra-short-term trading, its impact on institutional capital and long-horizon investors remains limited. Over time, this may help moderate excessive speculative churn and encourage more thoughtful capital deployment,” Rajesh K., CFP, Founder & CEO, BlissMoney Fintech Pvt. Ltd said.
Several factors influence the size of the fiscal deficit. When the economy is weak, unemployment may rise and business incomes may fall, reducing tax collections. At the same time, the government may need to spend more on welfare and support measures, which widens the deficit.