FISCAL DEFICIT TRENDS AMONG INDIA

INTRODUCTION

1. FISCAL DEFICIT IN INDIA .............................................................. 2

2. ADVANTAGES OF FISCAL POLICY ............................................. 7
3. DISADVANTAEGES OF FISCAL DEFICIT .................................. 10
4. NATURE OF FISCAL DEFICIT ........................................................11
5. UNION BUDGET 2013-2014 ...............................................................12
CONCLUSION ......................................................................................... 14
BIBLIOGRAPHY

FISCAL DEFICIT TRENDS AMONG INDIA

INTRODUCTION

In economics , fiscal policy is the use of government revenue collection (taxation) and
expenditure (spending) to influence the economy.[1] The two main instruments of fiscal policy
are changes in the level and composition of taxation and government spending in various
sectors. These changes can affect the following macroeconomic variables in an economy:

Aggregate demand and the level of economic activity;

The distribution of income;

The pattern of resource allocation within the government sector and relative to
the private sector.

Fiscal policy refers to the use of the government budget to influence economic activity.
Before the Great Depression in the United States, the governments approach to the economy
was laissez faire. But following the Second World War, it was determined that the
government had to take a proactive role in the economy to regulate unemployment, business
cycles, inflation and the cost of money. By using a mixture of both monetary and fiscal
policies (depending on the political orientations and the philosophies of those in power at a
particular time, one policy may dominate over another), governments are able to control
economic phenomena.
AIMS AND OBJECTIVE
Objectives of Fiscal Policy
1. To achieve desirable price level:
The stability of general prices is necessary for economic stability. The maintenance of a
desirable price level has good effects on production, employment and national income. Fiscal
policy should be used to remove; fluctuations in price level so that ideal level is maintained.
2. To Achieve desirable consumption level:
A desirable consumption level is important for political, social and economic consideration.
Consumption can be affected by expenditure and tax policies of the government. Fiscal
policy should be used to increase welfare of the economy through consumption level.
3. To Achieve desirable employment level:

FISCAL DEFICIT TRENDS AMONG INDIA

The efficient employment level is most important in determining the living standard of the
people. It is necessary for political stability and for maximization of production. Fiscal policy
should achieve this level.
4. To achieve desirable income distribution:
The distribution of income determines the type of economic activities the amount of savings.
In this way, it is related to prices, consumption and employment. Income distribution should
be equal to the most possible degree. Fiscal policy can achieve equality in distribution of
income.

5. Increase in capital formation:

In under-developed countries deficiency of capital is the main reason for under-development.
Large amounts are required for industry and economic development. Fiscal policy can divert
resources and increase capital.
6. Degree of inflation:
In under-developed countries, a degree of inflation is required for economic development.
After a limit, inflationary be used to get rid of this situation.
While we are battered with news about abandoned babies, victories and then losses for
telecom firms, elections in UP and surging stock markets, it's useful to note the quietly
released data on the fiscal deficit that are seriously alarming.
The Comptroller General of Accounts (CGA) has reported that the government revenue, from
April to December 2011, is 15% lower than the same period last year. Meanwhile, total
expenditure is up 14%. Higher spending and lower revenue point to a fiscal deficit that is
more than double last year's figures, till December.
Fiscal deficit is an economic phenomenon, where the Government's total expenditure
surpasses the revenue generated . It is the difference between the government's total receipts
(excluding borrowing) and total expenditure. Fiscal deficit gives the signal to the government
about the total borrowing requirements from all sources.

Components of fiscal deficit

The primary component of fiscal deficit includes revenue deficit and capital expenditure.
Revenue deficit: It is an economic phenomenon, where the net amount received fails to meet
the
predicted
net
amount
to
be
received.
Capital expenditure: It is the fund used by an establishment to produce physical assets
3

FISCAL DEFICIT TRENDS AMONG INDIA

like property, equipments or industrial buildings. Capital expenditure is made by the

establishment
to
consistently
maintain
the
operational
activities.
In India, the fiscal deficit is financed by obtaining funds from Reserve Bank of India, called
deficit financing. The fiscal deficit is also financed by obtaining funds from
the money market (primarily from banks).
Arguments: Fiscal deficit lead to inflation
According to the view of renowned economist John Maynard Keynes, fiscal deficits
facilitates nations to escape from economic recession. From another point of view, it is
believed that government need to avoid deficits to maintain a balanced budget policy.
In order to relate high fiscal deficit to inflation, some economists believe that the portion of
fiscal deficit, which is financed by obtaining funds from the Reserve Bank of India, directs to
rise in the money stock and a higher money stock eventually heads towards inflation.
Expert recommendation
Financial advisors recommend that the Government should not promote disinvestment to
reduce fiscal deficits. Fiscal deficit can be reduced by bringing up revenues or by lowering
expenditure.
Impact
Fiscal deficit reduction has an impact over the agricultural sector and social sector.
Government'sinvestments in these sectors will be reduced.

FISCAL DEFICIT TRENDS AMONG INDIA

CHAPTER 1 : FISCAL POLICY IN INDIA

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. While
calculating the total revenue, borrowings are not included. Generally fiscal deficit takes place
due to either revenue deficit or a major hike in capital expenditure. Capital expenditure is
incurred to create long-term assets such as factories, buildings and other development. 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.

Fiscal deficit is an economic phenomenon, where the Government's total expenditure

surpasses the revenue generated . It is the difference between the government's total receipts
(excluding borrowing) and total expenditure. Fiscal deficit gives the signal to the government
about the total borrowing requirements from all sources
Components of fiscal deficit
The primary component of fiscal deficit includes revenue deficit and capital expenditure.
Revenue deficit: It is an economic phenomenon, where the net amount received fails to meet
the predicted net amount to be received.
Capital expenditure: It is the fund used by an establishment to produce physical assets like
property, equipments or industrial buildings. Capital expenditure is made by the
establishment to consistently maintain the operational activities.
In India, the fiscal deficit is financed by obtaining funds from Reserve Bank of India, called
deficit financing. The fiscal deficit is also financed by obtaining funds from the money
market (primarily from banks).
Arguments: Fiscal deficit lead to inflation
According to the view of renowned economist John Maynard Keynes, fiscal deficits
facilitates nations to escape from economic recession. From another point of view, it is
believed that government need to avoid deficits to maintain a balanced budget policy.

FISCAL DEFICIT TRENDS AMONG INDIA

In order to relate high fiscal deficit to inflation, some economists believe that the portion of
fiscal deficit, which is financed by obtaining funds from the Reserve Bank of India, directs to
rise in the money stock and a higher money stock eventually heads towards inflation.
Expert
recommendation
Financial advisors recommend that the Government should not promote disinvestment to
reduce fiscal deficits. Fiscal deficit can be reduced by bringing up revenues or by lowering
expenditure.
Impact
Fiscal deficit reduction has an impact over the agricultural sector and social sector.
Government's investments in these sectors will be reduced. The primary component of fiscal
deficit includes revenue deficit and capital expenditure.
Revenue deficit: It is an economic phenomenon, where the net amount received fails to meet
the predicted net amount to be received.
Capital expenditure: It is the fund used by an establishment to produce physical assets
like property, equipments or industrial buildings. Capital expenditure is made by the
establishment
to
consistently
maintain
the
operational
activities.
In India, the fiscal deficit is financed by obtaining funds from Reserve Bank of India, called
deficit financing. The fiscal deficit is also financed by obtaining funds from
the money market (primarily from banks).

FISCAL DEFICIT TRENDS AMONG INDIA

CHAPTER 3 ADVANTAGES OF FISCAL POLICY

Advantages
1. Transaction costs will be eliminated.
For instance, Uk firms currently spend about 1.5 billion a year buying and selling foreign
currencies
to
do
business
in
the
EU.
With the EMU this is eliminated, so increasing profitability of EU firms.
Advice to young people: You can go on holiday and not have to worry about getting your
money changed, therefore avoiding high conversion charges.
2. Price transparency.
Eu firms and households often find it difficult to accurately compare the prices of goods,
services and resources across the EU because of the distorting effects of exchange rate
differences.
This discourages trade. According to economic theory, prices should act as a mechanism to
allocate resources in an optimal way, so as to improve economic efficiency. There is a far
greater chance of this happening across an area where E.M.U exists.
Advice to young people: We can buy things without wrecking our brains trying to calculate
what price it is in our currency.
3. Uncertainty caused by Exchange rate fluctuations eliminated.
Many firms become wary when investing in other countries because of the uncertainty caused
by the fluctuating currencies in the EU. Investment would rise in the EMU area as the
currency is universal within the area, therefore the anxiety that was previously apparent is
there no more.
4. Single currency in single market makes sense.
Trade and everything else should operate more effectively and efficiently with the Euro.
Single currency in a single market seems to be the way forward.
5. Rival to the "Big Two".
If we look out in the world today we can see strong currencies such as the Japanese Yen and
The American $. America and Japan both have strong economies and have millions of
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FISCAL DEFICIT TRENDS AMONG INDIA

inhabitants. A newly found monetary union and a new currency in Europe could be a rival to
the
"BIG
TWO".
EMU can be self-supporting and so they could survive without trading with anyone outside
the
EMU
area.
This fact makes the Euro very strong already, and even George Soros couldn't affect it (well,
hopefully!!!!).
The situation that EMU is in is good as it seems that it can survive on its own, with or
without the help of Japan and U.S.A.
6. Prevent war.
The EMU is, and will be a political project. It's founding is a step towards European
integration, to prevent war in the union. It's a well known fact that countries who trade
effectively together don't wage war on each other and if EMU means more happy trade, then
this means, peace throughout Europe and beyond (we hope).
7. Increased Trade and reduced costs to firms.
Proponents of the move argue that it brings considerable economic trade through the wiping
out of exchange rate fluctuations, but as well as this it helps to lower costs to industry
because companies will not have to buy foreign exchange for use within the EU. For them,
EU represents the completion of the Single European Market. It is vital if Europe is to
compete with the other large trading blocs of the Far East and North America.
8. The Political agenda.
There is also a political agenda to European bank (the European System of Central Banks
-ESCB), the complete removal of national control over monetary policy and the partial
removal of control over fiscal policy. Individual nation states will lose sovereignty (i.e. the
ability to control their own affairs). It will be a considerble step down the road towards
political union. There are many in the EU who faviour economica dn political union and they
are very much in facour ot EMU. There are also many who wish to keep national sovereignty
and are strugging to prevent EMU, whatever its merits might be, from going ahead.
9. Inflation
From the mid-1980s onwards, there were a number of economists and politicians who argued
that, for the UK at least, EMU provided the best way forward to achieve low inflation rates
throughout the EU. During the first half of the 1980s high inflation countries, such as France
and Italy were forced to adopt policies which reduced their inflation rates to something
approximating the German inflation rates to something approximating the German inflation
rate. If they had not done this, the franc and the lira would have had to be periodically
devalued, negating the fixed exchange rate advantages of the system. Effectively, the German
central bank, the Bundesbank, set inflation targets and therefore monetary targets for the rest
of the EU. At the time, there was much discussion of why Germany had a better inflation
record than many other European countries. The consensus emerged that it was because the
Bundesbank, the German central bank, was independant of the German Government. In
8

FISCAL DEFICIT TRENDS AMONG INDIA

countries such as the UK and France, central banks were controlled by governments. If the
UK government decided to loosen monetary policy, for example, by reducing interest rates, it
had the power to order the Bank of England to carry out this policy on its behalf. There have
always been especially strong pressures before an election for UK governments to loosen the
monetary reins and create a boom in the economy, with the subsequent increase in inflation
following the election. The Bundesbank, in contrast, was independent of government. By law
it has a duty to maintain stable prices. It can resist pressures from the German government to
pursue reflation policies if it believes that these will increase inflation within the economy.
Events of the early 1990s have shaken the naieve faith that linkage to the independent ESBC,
the central bank of Europe would solve all inflationary problems. This is because German
inflation rates in the early 1990s rose to over 4% as Germany strugged with the consequences
of unification. In 1993, inflation was nearly three times as high in Germany as in the UK and
twice as high as that in France. Some countries, such as France, have made their central
banks independent on the Germany model and therefore arguably don't need to the EMU link
to Germany to maintained low inflation.The UK has gone a little way towards giving more
power to the central bank by publishing reports of monthly meetings between the Chancellor
of the Exchequer and the Governenor of the Bank of England. This forces the Government to
justify its monetary policy publically and makes it harder for it to use interest rates for short
term political ends.

FISCAL DEFICIT TRENDS AMONG INDIA

CHAPTER 3- DISADVANTAGES OF FISCAL POLICY

1. The instability of the system.

Throughout most of the 1980s the UK refused to join the ERM (Exchange rate mechanism).
It argued that it would be impossible to maintain exchange rate stability within the ERM,
especially in the early 1980s when the pound was a petro-currency and when the UK inflation
rate was consistently above that of Germany. When the UK joined the ERM in 1990 there had
been three years of relative currency stability in Europe and it looked as though the system
had become relatively robust. The events of Sept. 1992, when the UK and Italy were forced
to leave the system, showed that the system was much less robust than had been thought.
2. Over estimation of Trade benefits.
Some economists argue that the trade and cost advantages of EMU have been grossly over
estimated. There is little to be gained from moving from the present system which has some
stability built into it, to the rigidities which EMU would bring.
3. Loss of Sovereignty.
On the political side, it is argued that an independent central bank is undemocratic.
Governments must be able to control the actions of the central banks because Governments
have been democratically elected by the people, whereas an independent central bank would
be controlled by a non elected body. Moreover, there would be a considerable loss of
sovereignty. Power would be transferred from London to Brussels. This would be highly
undesirabel because national governments would lose the ability to control policy. It would
be one more step down the road towards a Europe where Brussels was akin to Westminster
and Westminster akin to a local authority.

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FISCAL DEFICIT TRENDS AMONG INDIA

CHAPTER 4 : NATURE OF FISCAL POLICY

Perhaps the most important economic argument relates to the deflationary tendencies within
the system. In the 1980s and 90's France succeeded in reducing her inflation rates to German
levels, but at the cost of higher unemployent, For the UK, it can be aruged, that membership
of the ERM between 1990 and 1992 prolonged unnecessarily the recessional period. This is
because the adjustment mechanism acts rather like that of the gold standard. Higher inflation
in one ERM country means that it is likely to generate current account deficits and put
downward pressure on its currency. To reduce the deficit and reduce inflation, the country has
to deflate its economy. In the UK, it could be argued that the battle to bring down inflation
had been won by the time the UK joined the ERM in 1990. However, the UK joined at too
high an exchange rate. It was too high because the UK was still running a large current
account deficit at an exchange rate of around 3 Dm to the pound. The UK government then
spent the next two years defending the value of the pound in the ERM with interest rates
which were too high to allow the economy to recover. Many forecasts predicted that, had the
UK not left the ERM in Sept 1992, inflation in the UK in 1993 would have been negative (ie
prices would have fallen).The economic cost of this would have been continued
unemployment at 3million and a stagnant economy. When the UK did leave the ERM and it
rapidly cut interest rates from 10% to five and a half %, there was strong economic growth
and the current account position improved, but there was an inflation cost.
Another problem that the early 1990s highlighted was that the needs of one part of Europe
can have a negative impact on the rest of Europe. In the early 1990s, the Germans struggled
with the economic consequences of German reunification. There was a large increase in
spending in Germany with a consequent rise in inflation. The Bundesbank responded by
raising German interest rates. As a result, there was an upward pressure on the DM as
speculative money was attracted into Germany. Germansy's ERM partners were then forced
to raise their interst rates to defend their currencies. However, higher interest rates forced
most of Europe into recession in 1992 - 1993. Countries such as France couldn't then get out
of recession by cutting interest rates because this would have put damaging strains on the
ERM. The overall result was that Europe suffered a recession because of local reunification
problems in Germany. Critics of the ERM and EMU argue that this could be repeated
frequently if EMU were ever to be achieved. Local economies would suffer economic shocks
because of policies, forced on them, designed to meet the problems of other parts of Europe.
One way around this would be to have large transfers of money from region to region when a
local area experienced a recession, e.g. N. Ireland which suffered structural unemployment
for most of the post war period, has had its economy propped up by large transfers of
resources from richer areas of the UK with lower unemployment. However, regional transfers
are very small at the moment unfortunately. Moreover to approximate the regional transfers
which occur at the moment in, say, Britain, there would have to be a huge transfer of

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FISCAL DEFICIT TRENDS AMONG INDIA

expenditures from national governments to Brussels - just what anti Europeans are opposed
to.

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FISCAL DEFICIT TRENDS AMONG INDIA

CHAPTER 5 UNION BUDGET 2013-2014

The government's fiscal deficit estimate for 2013-14 faces several risks and there could be a
slippage if the economy faces challenges in the next financial year, economists have said.
While finance minister P Chidambaram has won praise for keeping the fiscal deficit target in
2012-13 at 5.2% of GDP, marginally lower than the original estimate of 5.3%, economists
said the promise of keeping it at 4.8% of GDP in 2013-14 could be a bit optimistic against the
backdrop of challenging economic conditions. "Basing higher revenue generation on strong
GDP growth assumptions, taxing the super rich, and one-off revenues to achieve the 4.8%-ofGDP fiscal deficit target is risky, as macroeconomic conditions could be disappointing,"
Samiran Chakraborty and Anubhuti Sahay, economists at Standard Chartered, said in a
research note.

"There is a high probability of fiscal deficit slippage in 2013-14 unless capital expenditures
are reined in. Currently, we maintain 2013-14 fiscal deficit target at 4.8% of GDP in line with
the government projection, but watch closely for any adverse developments," the Standard
Chartered note said. Chidambaram has defended his estimates and has said he is confident of
a pick-up in growth which would help realize the targets while improving economic
prospects will also contribute in reversing the gloom. He has said that the government is
committed to sticking to the fiscal deficit target and said the 2013-14 budget had sent a strong
message about fiscal consolidation.
"We must redeem our promise by 2016-17 and bring down the fiscal deficit to 3%, the
revenue deficit to 1.5% and the effective revenue deficit to zero," Chidambaram said in his
Budget speech. But economists have expressed doubts about the government's ability to stick
to a strict fiscal plan against the backdrop of looming elections.
Indranil Pan, chief economist at Kotak Mahindra Bank, said the 4.8% fiscal deficit target for
2013-14 may be slightly optimistic and estimated it to be at 5.3% of GDP. He said the
government has under-provided for oil subsidies and the revenue targets may be a bit
optimistic, being contingent on a large divestment programme of Rs 54,000 crore
. Rohini Malkani, economist at Citigroup India, said the Budget arithmetic may be a tad
optimistic. "The FM did keep his word on fiscal targets, with the deficit in 2012-13 coming in
at 5.2%, marginally below his 5.3% target. This was in line with expectations, largely due to
expenditure compression and the usual deferment in fuel subsidies. Going forward for 201314, the Budget arithmetic is based on nominal GDP growth of 13.4%, total receipts of 23.4%

13

FISCAL DEFICIT TRENDS AMONG INDIA

and expenditures up 16.4%, all of which we believe are a tad on the optimistic side," Malkani
said in a note.
Even though moderation in growth might pose difficulties in revenue generation, the
government is hopeful of raising adequate revenue through various measures. The budget
estimates a higher collection of tax and non tax revenue. However, the disinvestment target
for FY14 which has been more than doubled from the revised estimates in the current fiscal
seems to be a tad ambitious. Besides reiterating its commitment towards fiscal consolidation,
the budget has tried to address various crucial issues i.e. promoting investments, encouraging
infrastructure activities, boosting rural demand through enhanced social sector spending,
initiating measures to boost savings, besides giving a thrust to capital markets including
developing the debt market and so on.

The focus of the government towards increasing investment in infrastructure, creating a

regulatory authority for the road sector, introducing investment allowance for attracting new
high value investments, creating industrial corridors besides announcement of projects in
National Waterways, Road and Ports sectors, devising a PPP policy framework in the coal
sector to some extent would boost infrastructure activities. Besides, a number of initiatives in
the Oil & Gas sector is also commendable.

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FISCAL DEFICIT TRENDS AMONG INDIA

CONCLUSION

The government today said restricting fiscal deficit to 5.3 per cent of GDP is a challenging
task given the uncertainty on disinvestments, higher subsidy outgo and subdued tax
collection. "Uncertainty on account of disinvestment receipts and likely higher subsidy
requirement does make it a challenging task to adhere to the overall fiscal deficit target
during 2012-13," said the mid-year economic review 2012-13 tabled in Parliament.
With the present trend and prevailing scenario in the capital market, it said that while efforts
are there for expeditious divestment, "nevertheless achieving the target of Rs 30,000 crore
during the remaining period of 2012-13 would be a challenge". While the government
realised Rs 125 crore by way of selling 10 per cent in NBCC, a 5.58 per cent stake sale in
Hindustan Copper (HCL) fetched Rs 808 crore. Last week the government raised Rs 6,000
crore by selling stake in NMDC. Referring to subsidy, the report said increasing subsidy bill
of three major subsidies -- food, fertiliser and petroleum -- has led to rising Non-Plan
expenditure.
The Centre's outgo on major subsidies was up 49 per cent to about Rs 1.42 lakh crore in the
first half of the fiscal against Rs 95,190 crore in the same period last year.
The analysis further said achieving Budget targets in case of corporate tax and customs and
central excise would be "somewhat difficult given the trend so far".
It said on the tax revenue side, the trend growth in the mid-year is lower than estimated.
To contain the increasing subsidy burden, the government has revised diesel prices and
capped supply of subsidised LPG cylinders to consumers.
The review report pegs the fiscal deficit at 5.3 per cent of GDP as against 5.1 per cent
projected in the Budget. The Centre's fiscal deficit touched a high of 5.9 per cent in the
previous fiscal.
The Economic Survey 2011-12 had pointed out the reasons for the lower-than budgeted fiscal
outcome in 2011-12 due to the sharp slowdown in industry, rising costs and thinning profits, a
less- than-conducive financial market inhibiting divestment plans, and continued high
subsidy outgo on account of firm global crude petroleum and fertiliser prices.
"This process has continued through the first half of the current fiscal," the review report
said, adding, these factors are unlikely to reverse substantially over the foreseeable future.

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FISCAL DEFICIT TRENDS AMONG INDIA

BIBLIOGRAPHY

Weaponless in price war, Business Line (Feb 16, 2007) ,

Heyne, P. T., Boettke, P. J., Prychitko, D. L. (2002): The Economic Way of Thinking (10th ed).
Prentice Hall.

Larch, M. and J. Nogueira Martins (2009): Fiscal Policy Making in the European Union - An
Assessment of Current Practice and Challenges. Routledge.

Hansen, Bent (2003): The Economic Theory of Fiscal Policy, Volume 3. Routledge

Economics times

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