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A new controversy on India’s Fiscal Deficit

  • Category
    Economy
  • Published
    21st Jan, 2020
  • Former Economic Affairs secretary, has claimed that the actual fiscal deficit for the last financial year and the current one is more than a full percentage point higher than the official data.

Context

  • Former Economic Affairs secretary, has claimed that the actual fiscal deficit for the last financial year and the current one is more than a full percentage point higher than the official data.
  • India’s fiscal deficit, which essentially maps how much money the Indian government has to borrow to make up the gap between its expenditure and its revenues, was just 3.4 per cent of the gross domestic product (GDP) for 2018-19.

About

Current Scenario-

  • All government expenditure, revenues and debts are required to be carried out through the Consolidated Fund of India (CFI).
  • If it is done so, the fiscal deficit of the Government should equal to the additional debt incurred during the year, all recorded in the CFI.
  • But all these transactions are not recorded through the CFI all the time. Some debt/liabilities are not assumed outside the CFI — either in the Public Account or totally outside the formal accounting system of the Government i.e. outside CFI and Public Account. Such transactions are described popularly as Below the Line, Off Budget etc.
  • Equity infusion in the Public Sector Banks (PSBs), during last few years, has been done by deducting debt received by the Government of India in from the PSBs from the equity investments made.
  • As a result, there is no impact of such expenditure/investment on fiscal deficit but the debt and liabilities stock of the Government goes up.

Fiscal Deficit:

  • Fiscal Deficit is the difference between the Revenue Receipts plus Non-debt Capital Receipts (NDCR) and the total expenditure.
  • In other words, fiscal deficit is “reflective of the total borrowing requirements of Government”.
  • The gross fiscal deficit (GFD) is the excess of total expenditure including loans net of recovery over revenue receipts (including external grants) and non-debt capital receipts.
  • The net fiscal deficit is the gross fiscal deficit less net lending of the Central government.

Significance of fiscal deficit:

  • The significance of fiscal deficit is that if this ratio is too high, it implies that there is a lesser amount of money left in the market for private entrepreneurs and businesses to borrow.
  • Lesser amount of this money, in turn, leads to higher rates of interest charged on such lending.
  • A higher fiscal deficit means higher borrowing by the government, which, in turn, mean higher interest rates in the economy.
  • A high fiscal deficit and higher interest rates at a current scenario like this would also mean that the efforts of the Reserve Bank of India to reduce interest rates are undone.

Implications of Fiscal Deficit:

  • Debt Trap-

 Borrowings not only involve repayment of principal amount, but also require payment of interest. Interest payments increase the revenue expenditure, which leads to revenue deficit. It creates a vicious circle of fiscal deficit and revenue deficit, wherein government takes more loans to repay the earlier loans. As a result, country is caught in a debt trap.

  • Inflation:

Government mainly borrows from Reserve Bank of India (RBI) to meet its fiscal deficit. RBI prints new currency to meet the deficit requirements. It increases the money supply in the economy and creates inflationary pressure.

  • Foreign dependence:

Government also borrows from rest of the world, which raises its dependence on other countries.

 Acceptable level of fiscal deficit?

  • There is no set universal level of fiscal deficit that is considered good. Typically, for a developing economy, where private enterprises may be weak and governments may be in a better state to invest, fiscal deficit could be higher than in a developed economy.
  • In developing economies, governments also have to invest in both social and physical infrastructure upfront without having adequate avenues for raising revenues.
  • In India, the Fiscal Responsibility and Budget Management Act requires the central government to reduced its fiscal deficit to 3 per cent of GDP. India has been struggling to achieve this mark.

Financing a Deficit

  • All deficits need to be financed. This is initially done through the sale of government securities, such as Treasury bonds(T-bonds).
  • Individuals, businesses, and other governments purchase Treasury bonds and lend money to the government with the promise of future payment.
  • The clear, initial impact of government borrowing is that it reduces the pool of available funds to be lent to or invested in other businesses.

Recent steps by Govt-

  • Government of India is recently issuing Fully Serviced Bonds (FSBs). These bonds are raised outside the CFI and Public Account and used from special purpose vehicles outside budget/ accounts to pay off the government expenditure/ subsidy.
  • Interest and principals of these liabilities are serviced by the Government at the time of payment. These bonds don’t enter into calculations of either fiscal deficit or the debt and liabilities of the Government.
  • The government has also been paying off food subsidy liability by providing cash from the National Small Savings Fund (NSSF).
  • Such transactions have the effect of reducing fiscal deficit and not showing up in the Debt and Liabilities of the Government.

Recent trends-

  • Fiscal deficitof the Union government rose to 114.8 per cent of the target in the first eight months of the fiscal year as per the data released by the Controller General of Accounts.
  • The gap between the government’s revenue and spending is at Rs 8.07 trillion at the end of November — Rs 1 trillion (13 per cent) more than the full-year target.
  • A persistent contraction in gross tax revenue, with expenditure growing consistently, has put pressure on government finances, resulting in a larger deficit
  • The corporation tax collection contracted to 1 per cent in April–November on the revenue side, budgetary capital spending on roads took the worst hit on the expenditure side.
  • Income support to farmers and food subsidy bills have taken a graver hit in terms of revenue expenditure.

Measures need to be taken-

  • Fiscal consolidation is important from the point of view of the credibility of policy-making.
  • A drastic reduction in expenditure on major subsidies such as food, fertilisers, exports, electricity to curtail public expenditure. A huge sum of money equal to Rs. 20,000 crores are spent on major subsidies on food, fertilisers, export promotion by the central government.
  • Interest payments account for about 40 per cent of expenditure on revenue account of the central government. Funds raised through disinvestment in the public sector should be used to retire a part of old public debt rather than financing current expenditure.
  • To reduce fiscal deficit and thereby check rise in inflation rate, apart from reducing government expenditure, government revenue has to be raised.
  • To increase revenue from taxation, tax base should be broadened by taxing agricultural incomes and incomes derived from unorganised industrial and services sectors. 
  • There should be restructuring of public sector enterprises so that they should make some surpluses at least for their own development so that their dependence on government’s budgetary resources should be dispensed with. For this purpose, their pricing policy should be such that it rsecovers at least user cost.
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