What is the Fiscal Deficit?
The fiscal deficit is the difference between the
government's total expenditure and its total receipts (excluding borrowing). Or we can say that if Total Expenditure
>Total receipt i.e.
Fiscal
Deficit = Total Expenditure- Total Receipt
It indicates government’s borrowing requirements from all sources to
finance its expenditure. Fiscal deficit is expressed as a percent of GDP which
indicates capacity of a country to borrow in relation to what it produces.
High % to GDP means
government is borrowing beyond its capacity in relation to what its
producing which is its income.
The
elements of the fiscal deficit are
·
The revenue deficit, which is the difference
between the government’s current (or revenue) expenditure and total current
receipts (that is, excluding borrowing) and
·
Capital expenditure.
The fiscal deficit can
be financed by borrowing from the Reserve Bank of India (which is also called
deficit financing or money creation) and market borrowing (from the money market
that is mainly from banks).The money borrowed by a nations government is called
public debt. As on any other debt, the Government promises to pay a certain
rate of Interest. To pay this interest in the future, the Government has
following options:
·
Increase the amount of taxes collected by
increasing the tax rates:
·
Help stimulate economic growth so that tax
collection automatically increases with it; or
·
Print new currency notes to pay back the debt
also called debt monetization
But we can say that
first option is not advisable as it will create extra burden on the public
& business segments as well. 2nd option is best out of three
where as third option is dangerous as it will cause and lead towards inflation.
Reasons
of Fiscal Deficit
In an ideal financial
system, which has a balanced fiscal deficit, the cost of expenditure is low
while production and growth is advancing. But when there is an increase in
fiscal deficit it means that the government is spending too much while it is earning
less. Hence, it is important that the government keeps its expenses under
control.
·
Government is spending money on unproductive program’s
which do not increase economic Productivity. So if govt. is
providing amenities to any section of people without creating conditions for
them to be more economically productive these kinds of facilities it is
spending on unproductive program.
·
It can also mean that the tax collection
machinery is not effective so that a significant proportion of people get away
without paying their due taxes.
Fiscal deficit does not
come about only in case of creating less revenue and spending more money.
Another major reason for a growing fiscal deficit can be slow economic growth
or sluggish economic activities.
How
fiscal deficit can be bad for India?
A large fiscal deficit
is an indication that the economy is in trouble and will have reasons to worry.
A high fiscal deficit could pose an inflation risk, minimize the growth of the
economy, doubt the government’s abilities; it could affect the country’s
sovereign rating, which in turn will limit foreign investors from looking at
India as one of the investment hubs.
Measure’s
to Decrease Fiscal deficit!
Permanent
The government if spends
in infrastructure sector like building Roads, Dams, Power Projects, then the
money spend by government comes back as earnings of the business entities and their
workforce.
In above case, the
increased expenditure has further multiplier effects because of the subsequent
spending of those whose incomes go up because of the initial expenditure. The
overall rise in economic activity in turn means that the government’s tax revenues
also increase. Therefore there is no increase in the fiscal deficit in such
cases.
Temporary
Curbing import on gold
is one of the measures taken by the government to correct the country’s fiscal
deficit. But with a weakening rupee and increase in global oil prices, the
finance minister might put a cap on the country’s expenditure to avoid pressure
on fiscal deficit.
Difference between fiscal
deficit and budget deficit
Budget Deficit
·
Budget deficit is commonly known as the national
debt.
·
Budget deficit means that a country has more
money going out when compared to the money its earning.
·
Budget deficits can usually be resolved by
raising taxes, cutting spending or a combination of both.
·
Unlike fiscal deficit, while calculating budget
deficit, the country’s borrowings are taken into consideration.
·
India’s budget deficit for the year 2012-13 is 5.2
% of GDP instead of expected 5.3% of GDP. Which will later on worked out on 4.89%
of GDP
Fiscal Deficit
·
In case of fiscal deficit, it can be measured
without taking into account the interest it pays on its debt.
·
Fiscal deficit is basically the difference
between the money it spends and the money it makes.
·
India’s fiscal deficit for year 2012-13 is 4.9%
of GDP and estimated fiscal deficit for year 2013-14 is 5.1% of GDP as per
budget documents.
Chart below gives snap shot break up of government receipts
and % contribution to its sub heads.(% contribution as per data given in FY13
Budget Estimates (BE).
Chart below gives snap shot break up of government
expenditure and % contribution to its sub heads.(% contribution as per data
given in FY13 BE).
Difference between fiscal
deficit and current account deficit
Fiscal Deficit
·
Fiscal deficit is a percentage of the nation’s
GDP and can be considered as an economic event in which the government
expenditure exceeds its revenue.
Current Account
Deficit
·
Current account deficit occurs when the
country’s imports are greater than the country’s exports of goods, services and
transfers.
Why is India’s fiscal
deficit continually high?
While the government fights to manage money, here are a few reasons
why India has a soaring fiscal deficit. It is high because in the corporate
sector, bailouts are becoming common and subsidies are being high. The money
that the government earns through non-tax revenue is not big and the money it
earns from taxes is not enough.
