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With continuous increase in government expenditures
and reduction in revenues, the fiscal deficit of
India has now reached a record high of 6.8% of Gross
Domestic Product (GDP), signalling to act as an impediment for
the long-term growth of the economy. Having set the
objective to pull it down to 5.5% in phases by the next fiscal, all
the functionaries have started working accordingly by
taking into consideration the impact on both growth and
inflation. Before moving ahead to alleviate the same, all the
pros and cons of the same need to be well understood
for ensuring good prospects for the economy.
Many readers of this article might think that why do
I keep considering the term deficit as `problematic'.
Well, the reason is camouflaged in the form of effects it can
put on the economy which have been big enough at
times, enabling it to decide the fate of the same in the longer-term. Concerns like further increase in deficit and
its implicit or explicit impact on inflation and, impact on the growth of the economy are quite alarming. It
should be clarified here that, with regard to inflation, if deficit grows, then probability of higher inflation also
increases, e.g., higher government borrowing will ensure higher money supply into the system, resulting in rise
in prices of goods and services. This can be in the form of: (a) printing the money through RBI and
(b) borrowing. But, on the other hand, moderate growth in the economy must also be ensured which can
be achieved by maintaining proper money supply into the system – by way of borrowing, government
ensures the outlay of funds in various infrastructure projects (like roads, dams, buildings, electricity, et al), social sectors like education, women empowerment, healthcare, poverty alleviation and the like. So, fiscal
deficit also results in increasing the economic output and thus demand.
In India, looking at the Index of Industrial Production (IIP) growth for the month of November 2009,
the figure is quite encouraging at 11.7% with registering the maximum growth of 12.7% in the
manufacturing sector. On the other hand, with regard to inflation, economists have revised their estimates to 6.5% from
an early 5% for the end of March 2010, which is a matter of concern.
If you carefully look at the above paragraph, you will find that there is a serious bone of
contention between the two whilst choosing the path of fiscal deficit hereon. On one hand, if we do not control the
fiscal deficit now, it may turn out to be a scary picture filled with the colors of inflation and, if we do, the chances
of hampering economic growth will increase. It would be handy to state here that fiscal deficit can either
be controlled by reducing the government expenditure or by increasing the revenues by way of higher
taxes and/or excise-duties. The Finance Minister has to meet some committed outlays in the forthcoming budget
so he is not left with much hope to reduce the government expenditure. The committed outlays can mainly
be towards empowering social sectors especially education and climate change in addition to concentrating
on infrastructure. This fact, lately, has also been cemented by the Finance Ministry after agreeing to increase
the Gross Budgetary Support (GBS) for the upcoming Union Budget by 15%. GBS is the monetary
assistance provided by the center to various schemes and projects of ministries.
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