The Danger of fiscal deficit
Reading time 3.30 min
.jpeg)
In this article, I am covering what a fiscal deficit is, the current position of the fiscal deficit, Why the fiscal deficit is decreasing, why there is a chance of an increase, and how to reduce the fiscal deficit, also called fiscal consolidation. Let us discuss these one by one.
What is Fiscal Deficit
.jpeg)
Fiscal Deficit is the difference between total
expenditure and the Revenue Receipts (including
Non-Debt Capital Receipts). FD is reflective of the
total borrowing requirement of Government.
Revenue Deficit refers to the excess of revenue
expenditure over revenue receipts. Effective
Revenue Deficit is the difference between Revenue
Deficit and Grant-in-Aid for Creation of Capital
Assets. Primary Deficit is measured as Fiscal
Deficit less interest payments. Effective Capital
Expenditure (Eff-Capex) refers to the sum of
Capital Expenditure and Grants-in-Aid for the Creation
of Capital Assets.. Fiscal deficit is usually presented as a percentage of the country’s total GDP. Efforts to reduce the fiscal deficit are called fiscal consolidation. The fiscal deficit is important for economic growth perception and also plays a significant role in the country’s credit rating.
At present, the fiscal deficit of the country is ₹1,653,670 crore. In terms of GDP, it is 5.6 percent of GDP. According to the Fiscal Responsibility and Budget Management Act (FRBM Act), the target is 3% of GDP.
After 2015, we saw a decline in the fiscal deficit, but in 2020, it increased due to COVID-19. However, from 2021 onward, we have seen a decline in the fiscal deficit.
Why Fiscal deficit is decreasing
Before going into this, I will first explain how it can be reduced. There are three ways to reduce the fiscal deficit. The first is to reduce expenditure to decrease borrowing. The second is to increase revenue. The third is to increase GDP. This is because, as I mentioned above, the fiscal deficit is presented as a percentage of GDP. If GDP increases and the fiscal deficit (in amount) remains constant, it ultimately reduces the fiscal deficit.
The fiscal deficit reduced after 2015 because of the following steps taken by the government:
1 Shift from the old pension scheme to the new pension scheme and less salary increment.
2 Cutting down subsidies, especially in petroleum and natural gases.
3 Privatizing The certain loss-making Public sector undertaking.
4 Reforms in the tax collection mechanism like GST, CENVAT, etc.
5 Declaring higher education as a non-priority sector and reducing its subsidy.
The fiscal deficit declined after 2021 because of the following reasons:
1 Increase in dividend payment by the RBI.
2 Increase in out-of-budget borrowing by the government that does not impact fiscal deficit.
3 Increase in GDP.
The danger of Fiscal deficit
There are some indicators that suggest an increase in the fiscal deficit:
1 The government shifting from the new pension scheme to a unified pension scheme aligned with the old pension scheme, which might increase government revenue expenditure.
2 An increase in the MSP (Minimum Support Price) of various crops and various interest subvention schemes.
3 As India witnesses harsh phases of climate change, such as the Wayanad landslide, floods in Uttarakhand, Gujarat, and Rajasthan, and heat wave threats, the government will need to invest more in restoration and disaster management.
4 An increase in the devolution of funds to states, reducing the revenue of the central government.
5 In this multipolar world, we have seen many conflicts like Ukraine-Russia, Armenia-Azerbaijan, and Israel-Palestine. These conflicts impact trade as well as the inflation of countries, which might lead to an increase in the fiscal deficit.
Ways to reduce fiscal deficit (Fiscal consolidation)
1. Increase capital expenditure - Capital expenditure leads to a circular effect on the fiscal deficit. When the government increases capital expenditure, it leads to an increase in GDP, and an increase in GDP will reduce the fiscal deficit.
↑ Capital expenditure > ↑ GDP > ↓ Fiscal deficit
2. Increase exports - This is a general point, but India has huge potential for exports. India's trade with Europe constitutes 18% of overall trade, but trade with South Asian countries is just 3%. As we know, developing countries are generally more import-dependent, so there is a huge scope for India to export to South Asian and South American countries. Increased exports lead to an increase in GDP, which would reduce the fiscal deficit.
3. De-dollarization - In trade, due to rate fluctuations in dollar rate, we have to pay more. If we eliminate the dollar and use our local currency, it helps us save more, which would lead to a reduced fiscal deficit. Recently, we imported petrol from Russia in rupees, which is 20% cheaper than from other countries. When we use our own currency, we expect it to come back to us as investment or trade, which again works as a circular flow.
4. Environmental impact assessment - As many bridge collapses in Bihar and Himachal, leading to huge losses for private as well as public companies, there is a need for mandatory Environmental Impact Assessments (EIA) to reduce such kind of losses.
5. Special obligatory budget - As various states spend a lot on Revari items like loan waivers and free electricity, states should be obligated to spend a certain amount of their budget on capital expenditure.
There are other ways too, such as encouraging credit agencies to improve India’s ranking ( currently BBB) so that we have to pay less interest on loan and reduce revenue expenditure, etc....
baki sab changa hai!!!!!!
If anything is left or if you have any suggestions, let me know
email ID: bhardwajsourabh1109@commerce.du.ac.in.
References
Comments
Post a Comment