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Indian Economy February 13, 2018

Deciphering Fiscal Deficit- Is It Always Bad?

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Fiscal Deficit has become a commonly debated budgetary term of late. It wasn’t until the government of India realized its expendituresare beyond its revenues that the policy makers contemplate embarking on the journey to fiscal prudence. Deciphering what fiscal deficit means and how it impacts the economy is the first step to recognizing underlying implications and here we give an insight into some basics.

Understanding fiscal deficit

Any governing authority earns its revenue by way of taxes, direct and indirect, and a few other sources like grants and loans and income from investments. The major chunk comes from taxes and this is also the most preferred source as the government has no subsequent liability to these taxpayers. The revenue so earned is spent on government programmes and policy actions, besides servicing the interest on debt and providing soft loans and grants to state governments. It is easy to note then that when revenue exceeds expenditure, we have a surplus, and in the reverse condition, it is the fiscal deficit.

How does it impact the economy? 

Having perpetual deficit comes with its own set of risks which are as below; 

  1. The most common of the negative impacts is the state unable to service its debt obligations and resorting to unwanted austerity measures like cutting pensions and sops and subsidies
  2. The government sometimes is pushed to a level of reaching out to international agencies like the International Monetary Fund for bailouts. Greece, for instance, was trapped in such setup in recent past and had to resort to asceticism in its public spending. 

In the Indian case, the deficit has stayed for long but hasn’t triggered a danger.

Contemporary economic sense advocates even financial surplus is harmful

Many traditional critics have panned governments that routinely rely on budgetary deficits to finance their expenses but the contemporary economic sense advocates otherwise. A surplus in the budget, in the modern view, means the government is more conservative and isn’t putting available resources to work. The capacity when left idle means economy is wasting the available resources.

Looking at the pros and cons of financial deficit, what would financial prudence be? 

Fiscal prudence does not mean weeding this deficit out of government’s financial statement for the year, rather managing the deficit prudently so that neither government spending is hit nor the state accumulates more than justifiable and financially feasible debt.

Steps taken by the Indian government towards financial prudence 

  1. The government enacted the Fiscal Responsibility and Budget Management Act in 2003 with a view to formalizing fiscal prudence and curbing any unwise lending by the governments both of the centre as well as of states.
  2. The maintenance of fiscal discipline and resorting to prudent borrowing by way of issuing bonds is at the heart of the FRBM Act.
  3. The government, led by the BJP,had set a fiscal deficit target of 3.5 percent of GDP for the Fiscal Year 2016-17, which it successfully achieved; for FY 2017-18 an ambitious goal of containing fiscal deficit to 3.2 percent of GDP was set, which unfortunately was missed. The government has revised the target to 3.3 percent for the next year. 

Also read: Is Falling GDP Growth Rate the Real Problem of India?

Suvipra view

The Fiscal deficit isn’t always risky, albeit when managed cautiously

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2 responses to “Deciphering Fiscal Deficit- Is It Always Bad?”

  1. Anish Khanna says:

    Very well explained

  2. Ketan Sinha says:

    The govt has not revised only next year’s fiscal target but also pushed achievement of 3% fiscal target to 2020-21.

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