Fiscal deficit vs trade deficit vs CAD

Much like we handle our household budget, the ruling government of a country handles its finances and budgeting. As family members draw an income and incur expenses, so does the country, deriving revenue through various means and incurring expenditure. Any imbalance in the income and outgo can create deficits or surpluses. Let us consider the three types of deficits, or shortfall, that the country can face.

Fiscal deficit
If the government’s total expenditure, excluding the borrowings, is more than its revenue or earnings, it leads to what is known as fiscal deficit. A high fiscal deficit is not a comfortable situation for any country and the government tries to bridge this shortfall through borrowings.

Fiscal deficit is represented as a percentage of the country’s gross domestic product (GDP), which is the total monetary value of all the goods and services produced in a country in a given period. For 2025-26, India’s fiscal deficit is estimated to be 4.4% of the GDP.

Trade deficit
Also known as a trade gap, this type of deficit or shortfall occurs when the total value of a country’s imports from other countries exceeds its exports. If, on the other hand, the total value of exports surpasses the imports, it is known as a trade surplus. This depends on several factors, such as the prices of goods and services, currency exchange rates, and tariffs, among others.

India’s trade deficit reached $26.4 billion in April 2025, exceeding the previous high of $21.5 billion in March.

Current account deficit
Though trade deficit and current account deficit (CAD) are used interchangeably, these are not the same. Current account deficit is the shortfall that occurs when the total money that a country sends abroad is more than the total money it receives from other countries. Trade deficit is only a part of this entire corpus, which includes transactions for goods and services, as well as other monetary transfers like foreign aid, investments, remittances, salaries, and payments.

India’s CAD was $11.5 billion, which was 1.1% of the GDP, in the third quarter of 2024-25.

Difference between the three deficits