Relevance: Mains: G.S paper III: Economy
Why in news?
- 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.
- Now, 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.
Key facts
- According to Garg, for the current financial year, too, the actual fiscal deficit is likely to range between 4.5 per cent to 5 per cent of GDP.
- According to SC Garg, 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.
- All government expenditure, revenues and debts are required to be carried out through the Consolidated Fund of India (CFI). If it is done so, the fiscal deficit of the Government should equal to the additional debt incurred during the year, all recorded in the CFI.
- Unfortunately, all these transactions are not recorded through the CFI all the time. Some debt/liabilities are not assumed outside the CFI — either in the Public Account or totally outside the formal accounting system of the Government i.e. outside CFI and
Public Account. - Such transactions are described popularly as Below the Line, Off Budget etc.
What is fiscal deficit?
- The Union Budget’s “Budget at a Glance” document explains what fiscal deficit is. It states: “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”.
What is the significance of fiscal deficit?
- 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 (both big and small) and the governments (Centre and state).
- The significance of fiscal deficit is that 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.
- So, simply put, a higher fiscal deficit means higher borrowing by the government, which, in turn, mean higher interest rates in the economy.
- This concern becomes even more significant when, like today, Indian businesses are facing high interest rates.
- 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.
What is the acceptable level of fiscal deficit?
- 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.
