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Submitted by:
Apurva Sharma
Section - A
Seat No – 60
Enroll No –10BSPHH010148
INDEX
Serial No Topic Page No.
1
1 Objective 3
2 Methodology 4
3 Introduction 5-6
6 Government Revenue 10
& Expenditure
7 Correlation 11
10 References 15
2
OBJECTIVE
The objective of the study was to analyze the current trends in India’s fiscal deficit and Gross
Domestic product and also to study the impact of increasing fiscal deficit on the various
components of Gross Domestic Product.
3
METHODOLOGY
Secondary data required was for the project was collected from various websites and books of
reputed authors.
The project commenced from sorting the data and arranging them in perfect order.
4
INTRODUCTION
A Deficit is the amount by which a particular sum of money falls short of the required amount
of money.
Fiscal deficit is an economic funda, where the Government's total expenditure exceeds the
revenue generated. It is the difference between the Government's total receipts (excluding
borrowing) and total expenditure. It gives the signal to the government regarding the total
borrowing requirements from all sources.
An increase in fiscal deficit means that the government is not able to meet its total expenditure
out of its total receipts.
The Gross Domestic Product (GDP) is the amount of goods and services produced in a year in
a country. It is the market value of all final goods and services made within the borders of a
country in a year.
GDP = C + I + G + (X-M)
Where,
C = Private Consumption
It is the largest GDP component in the economy, consisting of private household final
consumption expenditure in the economy. These personal expenditures fall under one of the
following categories: durable goods and non-durable goods, and services. Examples include
food, rent, jewelry, and medical expenses but do not include the purchase of new housing.
I = Gross Investment
It includes business investment in equipments and does not include exchanges of existing assets.
Examples include construction of a new mine, purchase of software, or purchase of machinery
and equipment for a factory. Spending by households (not government) on new houses is also
included in Investment. Buying financial products is classed as 'saving', as opposed to
investment. This avoids double-counting, if one buys shares in a company, and the company uses
the money received to buy plant, equipment, etc., the amount will be counted toward GDP when
the company spends the money on those things.
5
G = Government Spending
It is the sum of government expenditures on final goods and services. It includes salaries
of public sector employees, purchase of weapons for the military, and any investment
expenditure by a government. It does not include any transfer payments.
X = Exports
It represents gross exports. GDP considers the amount a country produces, including goods and
services produced for other nations' consumption, therefore exports are added.
M = Imports
It represents gross imports. Imports are subtracted since imported goods will be included in the
terms G, I, or C, and must be deducted to avoid including foreign supply as domestic.
Through the bar graph we can see that the fiscal deficit remained more or less constant and
below the Rs 150000 crore mark during the period 2000-08. But after that from the year
2009 the fiscal deficit in India has shot to Rs 350000 crore mark and has kept increasing in
the following years.
The reason for this sudden increase fiscal deficit since 2008 can
be attributed to the following reasons:
1. Tax Cuts
In 2007-08 period the tax rate was the highest at 11.99 but since then in the following
years the tax rate has come down from 11.99 to an average tax rate of 10.59 but it has
started to increase in the 2010-11 period.
6
2. Stimulus Packages
Due to global financial crisis the Government of India announced the first stimulus
package on 7th December 2008. Since the Government has announced three more
stimulus packages as of 2009.
These measures were taken to support the micro, small and medium sector enterprises.
The priority was to re-assure the people of the country of the stability of the
financial system in general and also of the safety of bank deposits in particular.
For this steps were taken to infuse liquidity into the banking system and
also to address problems being faced by various non-bank financing companies. These
steps have ensured that the financial system is functioning effectively without suffering
the kind of loss of confidence experienced in
the industrialized world.
There was a hike of 21% in the salaries of around 50 lakh employees of the Government
of India. The wage increased the financial implications for the Centre by Rs. 17,798 crore
annually and the arrears costed Rs. 29,373 crore.
There is a sharp increase in the defence expenditure since 2008 from Rs 92500 crore in
2008 to Rs 1108749 crore in 2010-11.
A large number of infrastructure projects were cleared for implementation in the Public
Private Partnership mode. In order to support financing of such projects, Government of
India decided to authorize the India Infrastructure Finance Company Limited (IIFCL) to
raise Rs. 10,000 crore through tax free bonds by 31st March 2009. These funds were to be
7
used by IIFCL to refinance bank lending of longer maturity to eligible infrastructure
projects, particularly in highways and port sectors.
Through this bar graph we can see that the Government Spending is at all times more than
the Government Receipts since 2000.This leads to fiscal deficit in the country.
Gross Fiscal
Deficit GDP at MP
Gross Fiscal Deficit Pearson Correlation 1 .816(*)
Sig. (2-tailed)
N 6
GDP at MP Pearson Correlation .816(*) 1
Sig. (2-tailed) .048
N 6
* Correlation is significant at the 0.05 level (2-tailed).
There is relatively high positive correlation of .816 between Gross Fiscal Deficit and Gross
Domestic Product which means as fiscal deficit increases GDP also increases.
8
services. Hence, final consumption of the households increases. But supply cannot vary in
the short term, so there is a temporary mismatch of demand & supply in the economy which
exerts an upward pressure on inflation.
9
1) The Increase in fiscal deficit causes the interest rates to rise in the
economy.
To reduce the Fiscal Deficit government borrows from the money market. Large
amount of borrowings by government results in higher interest rates. Higher
interest rates crowds out the private investment which means lower private
consumption. Also, higher borrowings by Government reduce liquidity in the
economy, leaving
fewer opportunities for
Year Rate banks to lend to private
2004 11 players.
2005 10.75
2006 10.75
2007 12.5
2008 12.75
2009 12.5
2010 12
10
This is because the part of the fiscal deficit which is financed by borrowing from the
RBI leads to an increase in the stock of money and a higher money stock
automatically leads to inflation since more money chases the same good.
Year Rate
200
3.80 %
4
200
4.20 %
5
200
4.20 %
6
200
5.30 %
7
200
6.40 %
8
200
8.30 %
9
201 10.90
0 %
11
Ways to Reduce Fiscal Deficit
• Reduction in Expenditure
12
References
1. www.rbi.org.in
2. www.indexmundi.com
3. Macroeconomics - Dornbusch,Fischer,Startz
4. Business Beacon
13