A Study on Fiscal Deficit and Its Effect on Economic Growth in India

Abstract The fiscal imbalance refers to the difference between government's revenue and expenditure. It is an important aspect of any economy. The paper shows the relationship between fiscal deficit and GDP growth in India from 1970-71 to 2022-23. As per the descriptive statistics, there was reasonably large variability in both gross fiscal deficit and GDP. The average budgetary shortfall, which has a large standard deviation confirming its significant variations over time, is estimated from annual data of the Reserve Bank of India. Both the data for Fiscal Deficit and the GDP showed a positive skewness indicating periods of rapid jumps in recent years. A linear regression model was used to see how variations in fiscal deficit influence economic growth. The results of the model show a significant positive relationship as it shows that the model explains 87 percent of GDP growth. The result of the regression indicates that an increase in the fiscal deficit, which usually results from greater government spending, leads to higher GDP growth. As per the study, while fiscal deficits may induce economic growth in the short run, it may entail risks associated with fiscal instability and unsustainable national debt. As per the study, a balanced fiscal policy is essential to sustainable economic development and the negative effects of a prolonged fiscal deficit.