What is Fiscal Deficit ? Fiscal Deficit is an economic phenomenon, where the government’s total expenditure surpasses the revenue generated. It is the difference between government’s total receipts (excluding borrowing) and total expenditure. Fiscal deficit gives the signal to the government about the total borrowing requirements from all sources. The primary component of fiscal deficit includes – revenue deficit and capital expenditure. The capital Expenditure is the fund used by an establishment to produce physical assets like property, equipments or industrial buildings.
Capital expenditure is made by the establishment to consistently maintain the operational activities. In India, the fiscal deficit is financed by obtaining funds from Reserve Bank of India, called deficit financing. The fiscal deficit is also financed by obtaining funds from the money market (primarily from banks). Why Fiscal Deficit creates problem for the economy of the country? According to the view of renowned economist John Maynard Keynes, fiscal deficits facilitate nations to escape from economic recession. From another point of view, it is believed that government needs to avoid deficits to maintain a balanced budget policy.
According to Keynesian economic theories, running a fiscal deficit and increasing government debt can initially stimulate economic activity only when a country’s output (GDP) is below its potential output. But when an economy is running near or at its potential level of output, fiscal deficits can cause high inflation. At that point FISCAL DEFICIT MUST BE CONTROLLED. In order to relate high fiscal deficit to inflation, some economists believe that the portion of fiscal deficit, which is financed by obtaining funds from the Reserve Bank of India, directs to rise in the money stock and a higher money stock eventually heads towards inflation.
Trends in the Fiscal Deficits of India in past few years – The fiscal deficit of the Central Government has improved substantially from 5. 9% of GDP in 2002-03 to 2. 7% in 2007-08. The revenue deficit of the Central Government declined from 4. 4% of GDP to 1. 1% during the same period. In conformity with the fiscal restructuring recommended by Fiscal Responsibility and Budget Management Act – FRBM, the fiscal deficit is required to be contained within 3 % of GDP for the Centre and 3% of GSDP for each of the State governments, which have enacted FRBM legislation.
All the State governments except for West Bengal and Sikkim have enacted FRBM legislation. This has resulted in substantial improvement in both Gross Fiscal Deficit and Revenue Deficit during the Tenth Plan. The combined fiscal deficit of the Centre and the States declined from 9. 6% of GDP in 2002-03 to 5. 6% in 2006-07, and further to 5. 3% in 2007-08. [pic] The fiscal deficit of both Centre and States increased substantially in the year 2008-09 due to the fiscal stimulus provided in the context of economic slowdown. The stimulus pushed the fiscal deficit and revenue deficit of the Central government up to 6. % and 4. 5% of GDP respectively in 2008-09 (RE). GFD for the Centre alone estimated to be 6. 2 percent of GDP at the RE (Revised Estimates) stage compared to 2. 5 percent of GDP at BE (Budget Estimates) stage in the year 2008-09. The combined revenue deficit of the Centre and States declined from 6. 6% of GDP in 2002-03 to 1. 3% in 2006-07 and further to 0. 9% in 2007-08. In the year 2008-09, revenue deficit of Centre was estimated to increase to 4. 45 per cent of GDP (RE) as against 1. 5% at BE stage. Fiscal stimulus allows the states to borrow over and above the FRBM limit to the extent of 0. % of GSDP. The fiscal consolidation effort by the State governments along with implementation of Twelfth Finance Commission (TFC) award improved the fiscal deficit of the States from – 4. 1% of GDP in 2002-03 to 2. 3% in 2007-08 (RE) and further to 2. 1% in 2008-09 (BE). The revenue deficit of the States has been eliminated completely by 2006-07 and all States are experiencing surplus in revenue account since then. This has been made possible primarily through a dual measure of higher tax collection and containment of non plan revenue expenditure.
Overview of Expenditures and receipts – A) Table for tenth plan and first two years of the Eleventh Plan. [pic] B) Expenditures – The total expenditure of Central government declined from a 16. 84% of GDP in 2002-03 to 15. 09% in 2007-08 and further to 14. 16% in 2008-09 (BE). However, the Central government expenditure increased by about 2. 5 percent point of GDP in 2008-09 (RE) as a consequence of fiscal stimulus provided to counter the impact of global recession on Indian economy. Total expenditure of all states declined from 17. 13% of GDP in 2002-03 to 16. 67% in 2007-08 (RE).
Decline in government expenditure under State finances is accounted for by significant cut in states non-plan expenditure from about 13. 52% of GDP in 2002-03 to 11. 29% of GDP in 2007-08 (RE). State plan expenditure during this period has increased from 3. 61% of GDP to 5. 39% in 2007-08 (RE). Budget estimates for 2008-09 brings down the total state government expenditure to 16. 45% of GDP. However, the fiscal stimulus provided by the Centre may push this figure upwards. C) Receipts – On the receipt side, the gross tax revenue of Central Government improved significantly from 8. % in 2002-03 to 11. 5% in 2007-08 but declined to 10. 4% in 2008-09 (RE). The Centre’s non tax revenue during this period declined from about 3% of GDP to 1. 8%. The State government’s own tax revenue increased during this period from 5. 8% of GDP to 6. 2%. Non-tax revenue of the states exhibited increase from 3. 3% of GDP to 3. 9% during 2002-03 to 2008-09. The State Government’s own tax revenue increased from 5. 8 % of GDP in 2002-03 to 6. 2% in 2007-08(RE) and remained same in 2008-09 (BE), while non tax revenue increased from 3. 2% to 3. 96 % of GDP in 2007-08 and budgeted to marginally decline at 3. 9 % of GDP in 2008-09(BE). Current scenario of Fiscal Deficit in India – an overview India’s fiscal deficit soared by 34 per cent to Rs 3. 5 lakh crore in the first ten months of the financial year against Rs 2. 62 lakh crore a year ago, mainly on account of the stimulus measures taken by the government to prop up the economy hit by the global financial crisis. This makes the April-January 2009 fiscal deficit at 87. 2 per cent of the budgeted estimate of 4. 1 lakh crore for the current fiscal. To spur economic activities, the government had initiated massive spending programmes and slashed duties from December 2008 in three stage following the global financial crisis that began in September 2008. Finance Minister Pranab Mukherjee presented a Budget with fiscal deficit of 5. 5 per cent for the next fiscal as he pegged total expenditure at Rs 11. 09 lakh crore on an estimated revenue of total tax and non-tax at Rs 6. 82 lakh crore for 2010-11. Till January 2010, the Centre’s overall expenditure stood at over Rs 7. 3 lakh crore, while receipts were way below at around Rs 4. 34 lakh crore, leading to a deficit of nearly Rs 3. 5 lakh crore. The government had pegged total expenditure at the record level of over Rs 10. 2 lakh crore this fiscal, 76. 8 per cent of which has already been incurred till January 2010. Of the over Rs 7. 8-lakh crore expenditure incurred by the government, over 70 per cent is accounted by non-plan outgo including interest payments. Meanwhile, the revenue deficit, which is the excess of revenue expenditure like salaries over revenue income, rose to Rs 2. 4 lakh crore till January 2010, an increase of 100 per cent over the the same time last year. The government’s tax collections at Rs 3. 33 lakh crore contributed the most to its kitty. What are various options in designing the policy for overcoming rising fiscal deficit? Finance minister has set a definite target for reducing the debt-GDP (gross domestic product) ratio. The combined debt of the Centre and the states is to be brought down to 68% of GDP by 2014-15 The government aims to reduce the combined fiscal deficit (Centre and states) from 9. 8% in 2009-10 to 8. % in 2010-11, having in principle accepted the fiscal road map as laid down by the 13th Finance Commission. 13th Finance Commission recommended that the debt-GDP ratio of the Centre be cut to 45% by 2014-15. It has suggested that the Centre wipe out its revenue deficit and that the fiscal deficit should be reduced to 3% of GDP by 2013-14. Budget 2011- Government has raised excise duty by 2 per cent to 10 per cent and enhanced tax rates on other products making consumer goods like cars, ACs and several other items expensive. On the revenue front, CII (Confederation Of Indian Industries) suggested a ystem through which Rs 50,000 crore from Rs 2 lakh crore, held up in various disputes / litigations for long time, could be unlocked by resolving one quarter of the existing disputes. CII suggests measures such as facilitating negotiations, out of court settlement, establishing fast trials Court to achieve this. Besides this, Rs 40,000 crore can be raised through disinvestment. And the revenues from both these measures, along with that from higher tax collection and through 3G telecom auction Fiscal deficit could be expected to be reduced easily . According to CII, this can materialize a saving of 0. 8 percentage point in fiscal deficit.
CII’s recommendations on indirect taxes include continuation of 10% rate of peak customs duty, abolition of customs duty on inputs such as non-coking coal, PETROLEUM coke, scrap of non-ferrous metals, Ferro-nickel etc, and continuation of the general rate of excise duties at 8 per cent level. On direct taxes, CII has asked for reduction in MAT rate along with demanding extension of sunset clause under section 10 A and 10 B beyond Mar 31, 2011 for next 5 years as IT/ITEs sector are key contributors to foreign exchange earnings and many companies are in the process of setting up undertaking in these areas.
Some more ways suggested by various analysts are – Increasing Public Accountability of various government organizations, increasing their productivity by implementation of Modern Management Practices, Identifying loopholes those cause unproductive distribution of subsidies, Resourceful usage of Defence sector to generate revenues and focus on identifying and reducing possible leakages in international defence deals Resources/References Used in Preparation of this report – Please Note – All these links are accessed as on 29 March 2010, 01:41 am IST. 1) What is Fiscal Deficit, Disadvantages of it – ttp://gpbaroowah. blogspot. com/2010/01/why-and-how-to-reduce-fiscal-deficit-of .html 2) Trends in India’s Fiscal Deficit for last few years – taken from page numbers 8,9,10 on annual report (2008-09) of planning commission of india: http://planningcommission. nic. in/reports/genrep/ar0809eng. pdf 3) Analysis of India’s current fiscal statistics reported on rediff business portal – http://business. rediff. com/report/2010/mar/02/budget-2010-indias-fiscal-deficit-rises. htm 4) National Summary Data Page on Finance Ministry Website – http://finmin. nic. in/stats_data/nsdp_sdds/index. html