Introduction
For a
developing country like India, fiscal policy is an important developmental
tool. Following the twin objectives of
growth with macroeconomic stability, the government’s tax and expenditure
policies have often resulted in resource – expenditure imbalances and sharp
increases in public debt. Rising public
debt can adversely affect savings and investment either directly or indirectly
through interest rates and inflation, that can dampen the potential macro
economic growth prospects. Therefore, it
is not surprising that most of the macroeconomic stabilization models prescribe
low levels of government deficit and public debt. The empirical evidence, however, does not
suggest a strong association between growth, stabilization and low government
deficit. In fact, it has been argued
that if the Government’s structure of expenditure promotes fixed capital
formation, then the country’s output potential would rise. Then, fiscal deficit can in fact result in
macroeconomic growth. In such a
situation, the short-term macroeconomic stabilization issues that may follow
need to be effectively addressed for sustained macroeconomic growth with
stabilization.
Current Scenario
The government has projected a fiscal deficit target of 5.1% of gross
domestic product (GDP) for this fiscal year. But with economic growth slowing,
buoyant tax revenues may not materialize, the standing committee said in its
report on the demand for grants for 2012-13.
The government has already exceeded the fiscal deficit target for the
last fiscal year. Against a projected fiscal deficit of 4.6%, the government,
in its revised estimate, pegs it at 5.9% of GDP. The widening current account
deficit, the record borrowing programme, the shortfall in tax collections and
the likely deficit in disinvestment proceeds indicate further fiscal slippages.
The economy
received a severe jolt when the global economic meltdown reared its ugly head
in 2008. Although India was not affected
to the same extent as some advanced economies and emerging market economies
(EMEs), the ripple effect was bad enough. It hobbled the country’s steady
progress. The country’s exports took a
hit, foreign investments slowed down, import cover of FER (foreign exchange
reserve) declined and NRI deposits as a percentage of total net capital flow
fell steeply. By April 2012, the situation had worsened. The current account deficit (CAD) had risen
to over four percent of GDP. CAD and
fiscal deficit looked as ominous as they did in 1991. As usual, CAD was being financed by
debt-creating inflows but the share of debt-creating inflows was a whopping 65
percent in FY12 compared to 44 percent during the period 2001-10.
The move by
the rating agency Standard & Poor's in the third week of April 2012 to cut
the country's credit rating outlook to "negative" complicated matters
for the RBI. This dented investor
confidence which turned worse every time any economy-related data was announced
or rating agencies like S&P cut the rating outlook. When risk aversion is high, the success rate
of RBI intervention is low and the INR falls to low levels.
India's development experience reveals that policy
makers have not been particularly tardy in either allocating funds or coming
out with programs (some of the programs are unexceptionable in scope and size)
for social justice-oriented initiatives. But the poor outcomes, invariably, can
be traced to poor delivery.
Predictably, the budget stepped up capital
(investment) expenditure substantially. Also, there is a renewed thrust on
infrastructure development through Public Private Partnerships. As expected, a
higher allocation has been made for agriculture and various social programs.
Some enabling steps have also been initiated through the rationalization of tax
structure and policy.
Literature Survey
- Rajiv Kumar
and Alamuru Soumya in their paper “Fiscal Policy Issues for India after
the Global Financial Crisis (2008–2010)” states attempts
to understand India’s current fiscal situation, it’s likely future development,
and its impact on the economy in the context of a weak global recovery from the
current crisis. The impact of the global crisis has been transmitted to the
Indian economy through three distinct channels, namely: the financial sector,
exports, and exchange rates. The other significant channel of impact is the
slump in business and consumer confidence leading to decrease in investment and
consumption demand. The Indian government, to boost the demand, has announced
several stimulus packages. However, there is not much room for further fiscal
policy action as the consolidated fiscal deficit of the central and state
governments in 2009–2010 is already about 11% of the gross domestic product
(GDP). Any further increase in the fiscal deficit to GDP ratio could invite a
sharp downgrading of India’s credit rating and a loss of business confidence.
The paper reviews the existing theories on the relationship between fiscal
deficit and growth. It also analyzes the past trends and policy measures to
understand the possible implications for economic recovery and long run growth
in the Indian context
- Ram Bansal in his article “Implications of Budget
Deficit in India” states the following implications of fiscal
deficit. He identifies four
implications such as a) Economic growth in impeded b) Real incomes of the
people is lower than their apparent incomes c) Inflation in prices of
commodities makes life of common people miserable d) higher government
borrowing, preventing a decline in interest rates. And also he highlights a high government
spending is proposed to compensate for falling public spending to keep the
markets in good business. This shows that deficit budgeting is aimed at
taking care of interests of the market and not the people of the country.
Since markets are owned by capitalists of the country, so the budgetary
deficits suit capitalistic economy. Since India has been following this
practice since independence, the government of India cannot claim to be
pro-people, in-stead it is pro-capitalists of the country. The economic
results of Indian business and people also prove this. Indian business
community has been prospering regularly while the people still remain in
economic miseries.
- C.
Rangarajan and D.K.Srivastava in their paper “Fiscal Deficits and
Government Debt in India: Implications for Growth and Stabilization”
examines the long term profile of fiscal deficit and debt relative to GDP
in India, with a view to analyzing debt-deficit sustainability issues
along with the considerations relevant for determining suitable medium and
short-term fiscal policy stance. The impact of debt and fiscal deficit on
growth and interest rates that arises from their effect on saving and
investment are critical in any examination of sustainability of debt and
deficit. It is argued that large
structural primary deficits and interest payments relative to GDP have had
an adverse effect on growth in recent years. The Fiscal Responsibility and
Budget management Act (FRBMA) of the central government has certain
positive features. While the fiscal deficit target has been defined, it
should be considered in conjunction with a target debt-GDP ratio. Further,
the central FRBMA should be supplemented by state level fiscal
responsibility legislations and an effective hard budget constraint on sub
national borrowing. There is a clear need to bring down the combined
debt-GDP ratio from its current level, which is in excess of 80 percent of
GDP.
Problem Identification
A heavy
reliance is placed on enhanced government expenditure to put the economy back
on course. The fiscal deficit, as percentage of GDP, is projected at 6.8% in
2009/10 compared to 6% in 2008/09 (against a target of 2.5%) and 2.7% in
2007/08. These are the deficits of the central government. If the deficits of
the state governments and other off-budget liabilities of the central
government are added, the overall fiscal deficit comes to almost 11% of GDP.
A good part
of the borrowing (70%) announced in the budget will be to meet the gap in the
day-to-day expenditure of the government (referred to as revenue deficit in the
Indian budget), which comprises interest payments, defence, salaries and
pensions, subsidies and social programs. The balance is on account of the gap
in investment expenditure.
The size as
well as the quality of the fiscal deficit is, thus, unprecedented. The Fiscal
Responsibility and Budget Management Act (FRBM), passed in the Indian
Parliament with a lot of fanfare in 2004, which stipulated a fiscal deficit of
3% of GDP and zero revenue deficit by 2008/09, has been given a go by, even if
temporarily. Obviously there are concerns about what this fiscal deficit might
do to the private sector business environment in India. If the deficit were
financed through market borrowings that could crowd out private sector
investment; if financed through money creation that could fuel inflation and,
if financed through external borrowing that could upset the external sector
balance.
In summary, economies like India, where
structural rigidities, to varying degrees, act as barriers to entry for the
private sector, fiscal policy has to play an expansionary role. The choice in
such cases is not between public sector investment and private sector
investment but between public sector investment and no investment. A higher
fiscal deficit, then, need not result in unsustainable debt dynamics. The problem
arises if outcomes are not commensurate with investments.
From what
has been discussed above it is clear that the dynamics of the fiscal deficit
components have a bearing on the health of the national economy. One has to
understand the implications of the dynamics of these components for the
national economy so that the national economy can be guided along the right
lines. Hence a study is needed towards this end.
Statement of the Problem
The Fiscal
Responsibility and Budget Management Act (FRBM) passed in the Indian Parliament
with a lot of fanfare in 2004, which stipulated a fiscal deficit of 3% of GDP and
zero revenue deficits by 2008-09. Obviously there are concerns about what this fiscal deficit might do to
the private sector business environment in India. If the deficit were financed
through market borrowings that could crowd out private sector investment; if
financed through money creation that could fuel inflation and, if financed
through external borrowing that could upset the external sector balance.
The
problem arises if outcomes are not commensurate with investments. The fiscal deficit components have a bearing on the
health of the national economy. One has to understand the implications of the
dynamics of these components for the national economy and the factors which are
contributing to the fiscal deficit so that the national economy can be guided
along the right lines.
Hence the study has been taken to find out the causes towards fiscal
deficit and recommend means and ways to reduce the deficit.
Keeping in this mind the research
problem involved may briefly be stated as “What
are the hidden patterns of fiscal deficit of government of India and which are
the available paths to optimize its control?”
- Benefit of
subsidized diesel sale should be denied to affluent sections of society.
- Replace the
kerosene subsidy with free distribution of solar lamps
- Outlays
should translate into outcomes - enhancing the efficiency of funds spent
on various flagship programs like NREGA among others will help the better
management of fiscal deficit
- Populist
budget (Election-eve freebies) should be avoided
- E.g.
Free cell phones plus 200 minutes of talk time to those who are into BPL
category which costs Government Rs. 7000 crore. Waive-off of agricultural loans.
- Measures to
increase the tax revenue.
- For all we
know, if we take a deeper look at the subsidy regime we might realize to
our horror and disbelief that the same beneficiary has been subsidized
twice for the same purpose by the central government and state government
concerned.
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