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

1. 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

2. 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.    
3. 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?”

1. Benefit of subsidized diesel sale should be denied to affluent sections of society.
2. Replace the kerosene subsidy with free distribution of solar lamps
3. 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
4. Populist budget (Election-eve freebies) should be avoided
1. 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.
5. Measures to increase the tax revenue.
6. 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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