Fiscal deficit arises when a government's total expenditures exceed the income that it generates (excluding borrowings). Every year, the Government puts out a plan for its income and expenditure for the coming year, through the annual Union Budget. The excess of expenditure over income is termed as ‘fiscal deficit’.
The finance minister's budget speech always mentions the fiscal deficit as a percentage of the Gross Domestic Product (GDP) target, where GDP is a measure of the size of the whole economy. In the 2012-13 budget, the fiscal deficit was pegged at 5.1% of GDP for the next financial year. However, the government has now raised the fiscal deficit target for the current fiscal to 5.3% of GDP, from the 5.1% earlier, in view of increased subsidy outgo. For 2013-14, the aim is to achieve fiscal deficit of 4.8%, as indicated by the FM recently.
A large and persistent fiscal deficit can be an indication of several worrying signs in the economy, including high inflation. It can mean that the Government is spending money on unproductive programmes which do not increase economic productivity. It can also mean that tax collection machinery is not effective so that a significant proportion of people get away without paying their due taxes.
When there is a fiscal deficit, the Government needs additional funds. It can arrange for these funds either through borrowings or by raising its income stream through increasing taxes. The borrowings can be from either own citizens or from other countries or organisations like World Bank / IMF.
Thus, it is clear that deficit differs from debt, which is an accumulation of yearly deficits.