Implications of Fiscal Deficit

Implications of Fiscal Deficit

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During a fiscal year, the term "fiscal deficit" refers to the excess of total budget expenditures over total budget receipts, excluding borrowings. Simply put, it is the amount of money borrowed by the government to cover its costs. A significant deficit necessitates significant borrowing. When the government's resources are insufficient, the fiscal deficit is the amount the government must borrow from the market to cover its expenses. The Fiscal Deficit is calculated using the following formula:

Fiscal deficit = Total Expenditure – Revenue receipts – Capital receipts excluding borrowing

Clearly, the government's borrowing requirements are shown by Fiscal Deficit. It should be noted that the safe limit for the fiscal deficit is thought to be 5% of GDP. Once more, borrowing includes both the amount of the loan and the interest on the debt, or interest on the debt. Primary Deficit refers to the amount left over after deducting debt interest payments from borrowing.

Fiscal Deficit = Total Expenditure minus Capital Receipts minus Revenue Receipts minus Borrowings

A little thought will reveal that Fiscal Deficit is actually the same as borrowings. As a result, the government's borrowing requirement is represented by Fiscal Deficit. Is a fiscal deficit possible without a revenue deficit? Yes, it is possible (i) to have a surplus in the revenue budget but a deficit in the capital budget, or (ii) to have a surplus in the revenue budget but a deficit in the capital budget that is greater than the surplus in the revenue budget.

Importance - Fiscal Deficit depicts the government's borrowing requirements for the fiscal year. A bigger fiscal deficit means that the government is borrowing more money. The amount of money that needs to be borrowed by the government is indicated by the extent of the fiscal deficit. According to the summary of the budget found in Section 9.18, the estimated fiscal deficit for the government budget for 2012-13 is Rs 5, 13,590 crore (or 14, 90,925 – 9, 35,685 + 11,650 + 30,000). This indicates that borrowing will cover approximately 18% of spending.

The most significant effects of fiscal deficit are:

1. Financial traps - Borrowing is used to finance fiscal deficit. Additionally, borrowing creates issues with both the interest payment and loan repayment. The government's obligation to repay loan amounts and interest in the future rises with its borrowing. Interest costs more money, which leads to a bigger deficit in revenue. In the end, the government might have to borrow money to pay even interest, which could set up a debt trap and a vicious cycle.

2. Wastage of money - The majority of the time, excessive and wasteful spending by the government results from a high fiscal deficit. The economy may experience inflationary pressure as a result.

3. Pressure from inflation - In order to meet this demand, the government borrows money from the RBI, which then prints more currency notes—a process known as deficit financing. The economy may experience inflationary pressure as a result.

4. Use in part - Because some of the borrowing in the Fiscal Deficit is used to pay interest, the entire amount cannot be used for economic expansion and development. Spending can only be financed with primary deficit (interest payment from fiscal deficit).

5. Slows growth in the future - Borrowing places a financial burden on future generations to pay back loans and interest, which slows economic expansion.

How to Contro Fiscal Deficit

Borrowing is the only way to finance the Fiscal Deficit because the total expenditure exceeds the total receipts. It is important to note that the safe level of the fiscal deficit is thought to be 5% of the GDR.

1. Borrowing money from within the country - Borrowing money from domestic sources, such as public and commercial banks, can be used to close the fiscal deficit. It also includes withdrawing funds from small savings schemes and provident fund deposits. Because it does not increase the money supply, which is thought to be the primary cause of price increases, public borrowing to address a deficit is regarded as superior to deficit financing.

2. Borrowing money from other people - For instance, borrowing money from the World Bank, IMF, and other foreign financial institutions. (iii) Deficit financing involves printing new currency notes: Borrowing money from the Reserve Bank of India is another option for addressing the Fiscal Deficit. Treasury bills issued by the government are purchased by the RBI in exchange for cash from the government. By printing new currency notes in exchange for government securities, the RBI generates this cash. As a result, it's a simple way to raise money, but it also has drawbacks. It implies that the economy's money supply expands, resulting in inflationary trends and other problems brought on by deficit financing. Therefore, if deficit financing is necessary at all, it should be limited to safe levels.

Fiscal Deficit Reduction Initiatives

a. Fewer spending cuts in the public sector include:

(i) A significant decrease in the amount spent on major subsidies.

ii) Less money spent on bonuses, unused vacation time, and other benefits.

(iii) Austerity measures to reduce spending outside of the plan.

b. Revenue-raising measures include:

(i) The tax base should be expanded, and tax concessions and tax cuts should be restricted.

(ii) Tax evasion should be thoroughly investigated.

(iii) A greater emphasis on direct taxes as a means of raising money.

(iv) Reorganization and the sale of public sector shares.