Fiscal Deficit Explained: Meaning, Formula, Causes & Impact | Budget 2026–27

The fiscal deficit is a topic of discussion every year during budget presentations, but people often dismiss it as simply “the government’s deficit.” In simple terms, just as a household spends more than it earns, the government also has to borrow to cover its extra expenses. The fiscal deficit for Budget 2026-27 is estimated at approximately 4.3% of GDP. This isn’t always a bad sign if the spending is on development and infrastructure, it can boost growth. In this article, we will understand its meaning, calculation, causes, and effects in a simple way.

What is Fiscal Deficit?

A fiscal deficit occurs when the government’s total expenditure exceeds its total revenue, excluding borrowings. This means the government has to borrow additional money from the market to meet its expenses.

What constitutes the government’s total revenue?

• Revenue Receipts : This is the government’s regular income – such as tax collections (Income Tax, GST, Corporate Tax) and non-tax revenue (dividends, fees, licenses, etc.). The government does not have to repay this money.
• Capital Receipts : This includes disinvestment, sale of assets, and recovery of loans given. This is not a regular source of income.
• Borrowings : When the above two sources of income fall short of expenditure, the government borrows from the market by issuing bonds and securities. This is a means of financing the deficit, not a source of income.

Fiscal Deficit Formula 

There is a fixed and official formula for calculating the fiscal deficit, which is used in the budget documents every year.

Fiscal Deficit Formula

Fiscal Deficit = Total Expenditure – (Revenue Receipts + Non-Debt Capital Receipts)

Formula components : 

Constituent	What is included?	Meaning
Total Expenditure	Revenue + Capital expenditure	The government’s total annual expenditure
Revenue Receipts	Tax + Non-tax income	Regular income that does not have to be repaid.
Non-Debt Capital Receipts	Disinvestment, Loan recovery	Capital income that is not borrowed

Example : 

Item	Amount (₹ trillion)
Total Expenditure	52
Revenue Receipts	34
Non-Debt Capital Receipts	4

Fiscal Deficit = 52 – (34 + 4) = ₹14 lakh crore 

India Fiscal Deficit Status: Budget 2026–27 Key Numbers

Indicator	Budget 2026–27 Data	What does it represent?
Fiscal Deficit Target	4.3% of GDP	The government’s estimated total fiscal deficit as a percentage of GDP.
Revised Estimate 2025–26	4.4% of GDP	Revised deficit level of the previous year
Earlier Fiscal Target	Below 4.5% achieved	The government has achieved its previous deficit control target.
Net Market Borrowings	₹11.7 trillion	Net borrowing from the market (dated securities) to cover the deficit.
Public Capital Expenditure	₹12.2 trillion	Capital expenditure on infrastructure and development projects
Debt-to-GDP Ratio (2026–27)	55.6%	Total government debt as a percentage of GDP
Long-Term Debt Target	50±1% by 2030–31	Medium-term debt control target

Where Does the Government Spend So Much?

The biggest reason for a rising fiscal deficit is not simply “overspending,” but rather it’s crucial to examine where the spending is directed. In the 2026-27 budget, the government has clearly emphasized growth-oriented and asset-creating expenditure.

Capital Expenditure Push Emphasis on infrastructure and asset creation : 

Capital expenditure (Public Capex) has been increased to approximately ₹12.2 lakh crore in the Budget for 2026–27. This expenditure is for creating long-term assets.

• 7 new high-speed rail corridors (e.g., Mumbai-Pune, Delhi-Varanasi, Chennai-Bengaluru)
• Plan to operationalize 20 new national waterways over the next 5 years
• City Economic Regions (CER) for selected cities  ₹5,000 crore allocated per CER
• Large infrastructure projects have a direct impact on employment and logistics efficiency.

Manufacturing & Strategic Investment : 

The government has made several targeted announcements in the 2026-27 budget to strengthen the manufacturing and strategic sectors.

• Biopharma Mission : ₹10,000 crore, aiming to make India a global biopharma hub
• Semiconductor Mission (ISM 2.0) :  focusing on chip design and equipment manufacturing
• Electronics Manufacturing Outlay :  increased to approximately ₹40,000 crore
• Rare Earth Corridors :  development in Odisha, Kerala, Andhra Pradesh, and Tamil Nadu
• ₹10,000 crore for 3 new Chemical : Parks and Container Manufacturing

MSME and small industry support : 

Considering the MSME sector as a key pillar of employment and supply chains, special funding has been provided.

• SME Growth Fund : ₹10,000 crore for scaling up support to emerging enterprises
• Aatmanirbhar Enterprise Support : ₹2,000 crore in additional support for micro-enterprises
• TReDS Platform :  Mandatory transaction platform for government procurement from MSMEs

Read Also: Union Budget 2026 Highlights: Key Announcements, Tax, Capex & Sectors

Fiscal Deficit vs Budget Deficit vs Revenue Deficit

Criteria	Fiscal Deficit	Revenue Deficit	Primary Deficit
Simple meaning	The amount the government has to borrow to cover its total expenditure.	When the government’s revenue income is less than its revenue expenditure.	The deficit remaining after deducting interest payments from the fiscal deficit.
What does it show?	total borrowing requirement	Imbalance in daily government spending	The actual deficit for the current year (excluding interest on old debt)
Formula	Total Expenditure – (Revenue Receipts + Non-Debt Capital Receipts)	Revenue Expenditure – Revenue Receipts	Fiscal Deficit – Interest Payments
Type of expense	Both revenue and capital expenditures are included.	Only revenue expenses are included.	Adjusted form of fiscal deficit
What does it indicate?	How much will the government have to borrow from the market?	Is the government unable to cover its regular expenses with its regular income?	Is the new spending excessive, or is it simply the interest burden that is too high?
Risk level (generally)	Medium to high – depending on the percentage of GDP.	High – if it remains constant	Analytical indicators – show policy quality.
Used in policy analysis	Budget and borrowing analysis	Revenue management status	Understanding debt burden versus new spending

Main Causes of Fiscal Deficit

1. Economic Slowdown : When the economy slows down, tax collection also decreases. Government revenue from GST, corporate tax, and income tax falls, while expenditure remains relatively constant leading to a larger deficit.
2. High Government Spending : The government continuously needs to spend on several essential sectors—such as infrastructure, defense, health, education, and social programs. Large development projects and welfare schemes can increase the pressure on the deficit.
3. Interest Payment Burden : Interest payments on existing debt must be made every year. If the total debt is large, the interest payments are also substantial—and this becomes a persistent cause of the fiscal deficit.
4. Tax Structure Gaps : A narrow tax base, poor compliance, and a large informal economy prevent the government from collecting its full potential tax revenue.
5. Policy Stimulus Measures : Sometimes, the government deliberately provides sector-specific incentives, manufacturing subsidies, or industry packages to boost growth. This is strategic spending, but it can increase the deficit in the short term.

Is Fiscal Deficit Always Bad?

A fiscal deficit may seem negative at first glance, but it is not harmful in every situation.

When a Fiscal Deficit Can Be Beneficial : 

If the government invests the deficit funds in productive activities, it can strengthen the economy in the long run.

• Government spending is necessary to stimulate demand during a recession.
• Spending on infrastructure and long-term projects boosts future growth.
• Investments in manufacturing and technology improve productivity.
• Capital expenditure-based spending also promotes employment and private investment.

When a Fiscal Deficit Can Become a Risk : 

If the deficit remains consistently high and spending is unproductive, pressure builds up.

• Spending is primarily focused on consumption and subsidies.
• Debt and interest payments begin to rise rapidly.
• High government borrowing puts pressure on interest rates.
• Inflation and the currency are negatively affected.

How Fiscal Deficit Impacts Common Citizens ? 

1. Inflation could rise : If the government borrows more and spends more, the amount of money in the market increases. This often leads to higher prices for goods and services.
2. Loans could become more expensive : When the government borrows heavily, there is upward pressure on interest rates. This can make home loans and business loans more expensive.
3. Tax policy could change : If there is a persistent large deficit, the government may tighten tax regulations or introduce new methods of revenue collection in the future.
4. Job opportunities could also increase : If deficit spending is invested in infrastructure projects such as roads, railways, and factories, both economic activity and employment increase. This is what determines whether a deficit is beneficial or detrimental.

Impact on Investors & Markets

1. Bond Market : When the government borrows more, the supply of government bonds in the market increases. This typically drives bond yields higher. A rise in yields means that new borrowing becomes more expensive.
2. Stock Market : If the deficit is increasing due to capital expenditure and infrastructure spending, the market generally views this positively. In such times, there is increased interest in the shares of infrastructure, capital goods, and PSU project companies.
3. Currency : A persistently high deficit and increasing government debt make foreign investors cautious. This can put pressure on the currency, especially if the debt is rising rapidly.

Conclusion 

The fiscal deficit is an important indicator for understanding the state of the economy, but it shouldn’t always be viewed negatively. What’s more important is how the government is using the borrowed money. If the spending is on infrastructure, industry, and development projects, then that deficit can actually support future growth. The key is not in the size of the deficit, but in its judicious use. Stay updated with the latest market information – download Pocketful and begin your investing journey with zero brokerage.

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