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Fiscal Deficit in India Research Team | Posted On Saturday, January 02,2010, 12:01 PM

Fiscal Deficit in India



Fiscal Deficit in India

Just imagine you are expecting your salary at the beginning of the month. Out of the total amount received you need to pay your home rent, get your vehicle repaired, keep some money for yourself, give some for your loving spouse and parents, need to pay all the bills, need to pay for fuel and food, pay medical insurance premiums and do many more things and in case run out of cash in mid month or at the end of the month what do you do? Borrow from your friends or relatives and what in case you have already borrowed a lot from them which you have not repaid? This is pretty much the same situation that occurs in Indian economy.

There has been a lot of fuss about fiscal deficit especially during the announcement of budget this year and post budget announcement. Every now and then you must have gone through the statements given by finance minister Pranab Mukherji or Mr. P.Chidambaram or even our Prime Minister Mr. Manamohan Singh. But what is this fiscal deficit anyway and why is it being given such an attention?

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Fiscal deficit is defined as the deficit in the earnings by a government. Deficit in the sense the government spends a lot of money to see that the whole nation is stable and each individual is taken care of. The spending starts right from food to the protection. Whatever is the amount spent by the government it also gets the revenue from that. If the revenue generated by government is less than the investment or money that has been spent by the government it is called as fiscal deficit.

To define in terms of an economist “Fiscal deficit is an economic phenomenon, where the Government's total expenditure surpasses the revenue generated”.

Government Tax Revenue

The government gets revenues from many sources and one of the main sources of revenue for it is the taxes and duties. You will be surprised to know that more than 50% of the revenues of government come from the taxes and duties. Let’s find out the revenues of the government as per the budget 2009-10.

  • Income tax (9%)

  • Borrowings and other liabilities (34%)

  • Non-tax revenue (12%)

  • Service tax and other taxes (5%)

  • Union Excise Duties (9%)

  • Customs (8%)

  • Non-debt capital receipts (1%)

  • Corporate tax (22%)

Impact of Fiscal Deficit

Fiscal deficit can affect your day to day life in all the ways. It will have a huge impact on your standard of living. If the govt. doesn’t have sufficient money to spend, developmental activities will be stopped, generation of new employment opportunities will not happened. So it is very important that we all must be aware of the impact of fiscal deficit on the economy. 

  • Poor infrastructure Development

  • Lack of money supply in the economy

  • Low standard of living

  • Unemployment

  • Poverty

  • Instability in the economy

Fiscal deficit will kill the growth of a country. If the country is not growing, citizens of that country also will face difficulty.

See Also: Mutual Funds To Invest Your Money

Reasons for Deficit

There are many reasons which contribute to the shortage in the revenues collected by government and some of them are;

  • Capital investments done by government. Capital investments are those it’s worth or value is not realized in one year. For example the bridges, large utility buildings, purchase of machinery etc. these are some of the things in which you don’t get the entire amount that you have invested in the same year. Government also invests huge amount (in terms of hundreds of crores) and the returns are not obtained in one year, what it indicates is that spending or outflow is more compared to cash inflow.

  • Last two years we have experienced one of the worst cases of recession and some of the experts have even opined that it was more severe than the great depression of 1930’s. to overcome the effect of recession on economy government had taken many steps like reduction of interest rates, bail outs, easing of certain rules and regulations, tax exemptions to some extent, several economic stimulus packages. The fiscal stimulus package provided by government in order to maintain stability in economy was whopping 1,86,000 crore rupees.

  • Some of the investments done by the government which do not yield any returns for it. Some of such investments are rural development programs, food for school children, NREGS programs etc.

  • Last year the central government had to implement the recommendations of sixth pay commission and as a result of that it had to incur huge non-planned expenditures

  • The government increased the income tax slabs and as a result of that the number of individuals who were liable to pay tax received a tax shield.

  • There was a huge increase in the government’s non-planning expenditure. 

Fiscal Deficit in India 2009-10

The fiscal deficit for year 2009-10 was 6.8 and was the highest one in the last 17 years. Experts have said that when you include the state’s fiscal deficit of 3-4% the real fiscal deficit turns out to be 14% of GDP and the problem is that the domestic debt also is increasing. You will be surprised to know that the debt-GDP ratio of Greece is 90% and it is also said that the chances of Greece defaulting is “five minutes to midnight”. Happy news is that India’s debt-GDP ratio is 77%, but the matter to worry is that the French debt crisis and Italian debt crisis which happened in 1950 and 1970 were mainly due to the domestic debt. You may say that the government can print the money and pay off all the debts at once and at one look this may look as the best option, but the government will never ever opt for this option the reason is the whole financial system is balanced on two most important economic words “demand and supply”, what happens is that when there is a lot of money entering into the system the supply will rapidly increase and the value of money will fall and there will be a huge increase in the inflation.

Remedial Measures

Whenever the debt increases the government borrows money it may be borrowing from foreign countries, institutions like IMF or domestic borrowing from the citizens or from Reserve Bank of India which is the authorized banker for central government. The government needs to take some remedial measures in order to decrease this financial debt. Some of them would be;

  • The government is taking up some of the things like divestment of PSU’s which will increase the capital inflow for itself which will further decrease its borrowings, but the important thing to be noted here is that although with the divestment process government will get lump sum amount but at the same time it will also increase its debt obligation mainly the domestic debt.

  • Subsidies for items like food, oil, fertilizer etc should be done with great care because it’s seen that these subsidies are counter-productive for the government.

  • The new tax code also will play an important role because according to the government sources it will be implemented by 2011 and there are many changes on the block.

  • The estimates according to some of the new reports released by the government indicate that the government borrowings will be cut down from Rs 5,38,000 crores in 2009-10 to Rs 3,65,000 crores in 2010-11. 

Fiscal Deficit Updates

The fiscal deficit for the period April to October has been Rs 2.45 trillion. The tax receipts collected was Rs 2.14 trillion and the expenditure for the first seven months according to the government reports was at Rs 5.37 trillion. The high fiscal deficit of 6.4% percent this year has been accounted for the stimulus given to the businesses and duty sops provided in order to reduce the affect of ongoing financial depression. The finance minister has given his side of opinion that India will not be able to sustain high financial deficit. Government has aimed at reducing the fiscal deficit to 4% next year and to 1.5% by the end of 2012.

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