Indian economy is currently facing lot of challenges in many front whether its policy paralyses, falling rupee rate, inflation, current account deficit etc. but one of the critical which has a severe impact on everyone is “Fiscal Deficit”.
Fiscal deficit means the government’s total expenditure (excluding the money it’s borrowed) exceeds its revenue. Expenditure on money’s borrowed by government does not considered in fiscal deficit rather it forms part of budget deficit. Budget deficit is normally known as national debt. A country’s fiscal deficit is usually calculated as a percentage of its gross domestic product. Gross domestic product(GDP) means the market value of all the finished goods produced or services rendered within the domestic boundary of the country excluding imports occur within a defined territory.
In 2012-13, Union Budget, Finance Minister has projected fiscal deficit target of 5.1% of GDP which was later revised to 5.3% or Rs.5.33 lakh crores due to increased subsidy burden & the government would be able to lower the deficit at 4.89% due to higher tax collection.
Keeping in view of above, the government in Union Budget 2013-14 had proposed to lower the fiscal deficit to 4.8% of GDP & subsequently reduce it to 3% by 2016-17. However the deficit till November’2013 (in just 8 months) has already touched 4.5% (Rs 5.09 lakh crores) against 4.8% (Rs 5.42 lakh crores) projected in budget estimate.
Reasons of Fiscal Deficit
A variety of reasons have contributed to India’s increasing fiscal deficit. Some of the reasons are as follows:
· Subsidy on rising crude oil import along with increasing global oil prices. India’s 80% to 85% consumption of oil comes through import.
· Demand for gold has contributed to weaken the rupee rate against $ which makes the import costlier & thereby increasing the subsidy burden resulting widen fiscal deficit.
· Fertilizer subsidy. The government had already provided Rs 70,586 crores for fertilizer subsidy in 2013-14 to the department of fertilizers. Also in Sep’2013, Finance Ministry had approved Rs 5,500 crores subsidy under a special banking arrangement under which fertilizer companies can take loans from PSU banks against subsidy receivable, to meet its liquidity requirements.
· Increase in government expenditure towards unproductive areas like interest payment cost. According to the report of the rating agency, government needs to reduce its expenditure by Rs 1 billion during December- March 2014, to meet its fiscal deficit target of 4.8% of GDP.
· Having regulatory impediments in the domestic production of coal & rising demand of dry fuel(coal), despite India possessing huge reserves of coal, resulting in import dependency which in turn has negative impact on rupee rate & thereby increasing the subsidy burden resulting widen fiscal deficit.
It cannot be said that subsidies are bad in every sense rather it serves as protectionist that are provided to make domestic goods & services more competitive against imports. However in most cases, subsidies become of unproductive nature & have failed to serve the real purpose behind the government’s intention of providing the same.
Impact of Fiscal Deficit
· Higher fiscal deficit leads to higher level of inflation in the economy especially in Indian economy as compared to other developed nations like U.S.
Higher deficit indicates high level of government borrowings to meet its expenditure which leads to lower liquidity in the market resulting higher interest rates & higher inflation. If interest rate keeps on increasing or constant at higher level, then it badly impact the economy growth of the country due to non-availability of cheap debt financing to the industrial sector.
· Due to high fiscal deficit & lower growth, there’s always a risk of downward rating by global rating agencies which impact the sentiments of the foreign institutional investors. Recently global rating agency “Moody” retained its “Baa3 rating” with stable outlook but cautioned that downward pressure could develop if policies that impair growth & fiscal outlook are implemented.
Government measures to curb fiscal deficit
· Reduce fuel subsidy through deregulation of petrol & diesel prices in a phased manner & capping of subsidized LPG to 9 cylinders. However recently government is planning to raise subsidized LPG Cylinders to 12 which would result in an additional fuel subsidy burden of 3,300-5,800 crores.
· To meets its fiscal deficit, government has decided to use cash reserves of 20 PSU’s by seeking special dividend. Recently on 14th Jan’14, Coal India Ltd. Announced to give a record 290% interim dividend or Rs 16,485 crores & another Rs 3,113 crores towards dividend distribution tax (DDT).
· The most significant step from the point of view of broadening the tax base & improving revenue efficiency is the introduction of Companies Act’2013, Insurance law amendment bill, Goods & service tax and Direct tax code. However there is need to speed up the process of implementing GST & DTC, which has already delayed.
· On fertilizer side, government decided to move towards nutrient based subsidy for phosphatic & potassic fertilizers that could help the government save around Rs 5,000 crores.
· Ban on holdings of meetings & conferences at five star hotels, restriction on foreign travel 7 ban on creation of plan & non plan posts.
· Increased import duty on gold, silver & platinum to 15% to contain fiscal deficit to budget estimate.
Currently it can be said that India is facing the problem of high fiscal deficit but the country has potential to reduce it to comfort level of 3% or below achieved in 2007-08 (2.54% of GDP) provided government should come out with more effective policy measures, removing constraint in regulatory clearances to encourage investments & transparency etc.
However in the coming year, fiscal deficit is more likely to increase further because of populist policies announcement in the upcoming Lok Sabha election in 2014.
Trends in Revenue, Expenditure & Fiscal deficit of Central Government(% of GDP)
BE: Budget Estimates; RE: Revised Estimates
The above figures may not add up to the total due to rounding off.