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Current Affairs

Fiscal deficit

Date: 16 January 2020 Tags: Basics of Economics

Issue

Former Economic Affairs Secretary S C Garg has stated, in his blog dated January 14, that the true fiscal deficit for 2018-19 is 4.7%, more than a full percentage point than the number claimed by Finance Minister Nirmala Sitharam’s Budget in July.

 

Background

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.

For the current year, the Union Budget presented in July expected the fiscal deficit to be 3.3 per cent of the GDP.

 

Details

  • It has been suspected that the official figures hide the true fiscal deficit. That’s because some of the government’s expenditure was funded by the so-called “off-budget” items.

  • As a result, while this extra expenditure did not figure in the official calculations, it did mean that the true fiscal deficit or borrowing by the public sector was higher than the level presented in the Budget.

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.

Significance

  • In the economy, there is a limited pool of investible savings. These savings are used by financial institutions like banks to lend to private businesses and the governments.

  • 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 high fiscal deficit and higher interest rates at a time like this would also mean that the efforts of the Reserve Bank of India to reduce interest rates are undone.

Way forward

  • 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.

Fiscal deficit

Date: 22 September 2019 Tags: Basics of Economics

Issue

NITI Ayog vice-chairman Rajiv Kumar has said that the ?1.45 lakh crore tax giveaway is unlikely to widen fiscal deficit as the shortfall will be met through increased tax collections due to higher growth.

 

Background

The government had announced tax cuts for corporates by 10-12% points, bringing down the effective corporate tax to 25.17% inclusive of all cess and surcharges for domestic companies.

 

Details

  • Budget had estimated fiscal deficit at 3.3% of the GDP for the current fiscal but many analysts say it will be overshooting by at least 70 bps to 4.1% as the quantum of the giveaways is worth 0.7% of the GDP.

  • It is said that India’s tax buoyancy has been very good. Therefore, both direct and in direct tax collections will go up with growth after the tax cuts. The higher revenue from tax and non-tax fronts will help the government finance the fiscal deficit.

 

Fiscal Deficit

  • The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings needed by the government.

  • A fiscal deficit occurs when a government's total expenditures exceed the revenue that it generates, excluding money from borrowings.

  • A deficit is usually financed through borrowing from either the central bank of the country or raising money from capital markets by issuing different instruments like treasury bills and bonds.

 

Impact of Fiscal deficit

 Budget deficits crowd out private borrowing, manipulate capital structures and interest rates, decrease net exports, and lead to either higher taxes, higher inflation or both.