Governing India through fiscal math

moderator
By moderator July 29, 2019 15:25

Pulapre Balkrishnan, a Senior Fellow, IIM Kozhikode, suggests taking into account the revenue deficit along with the fiscal deficit reductions for sound economic management.  

Deficit measurement in India:

A deficit occurs when expenses exceed revenues, liabilities exceed assets and imports exceed exports. There are various ways to measure deficits in macroeconomics. A chart below explains the different types of deficits:  

Financing of the deficit is carried out by borrowings, either from the Central Bank of India or raising money from capital markets. Thus different instruments like treasury bonds and bills are issued.

What is the fiscal deficit?

The fiscal deficit is a deficit occurs with the government’s total expenditure exceeding its revenue expenditure, excluding money from borrowings. Fiscal deficit can be either ‘gross’ or ‘net’. The fiscal deficit reflects an overall imbalance in the budget.

It is calculated as,

 Fiscal Deficit =     Total Budget Expenditure – Total Budget Receipts (Excluding Borrowings)

Generally, fiscal deficit takes place either due to revenue deficit or a major hike in capital expenditure (which creates long-term assets). 

What is the revenue deficit?

Revenue deficit is a deficit occurs with the government’s revenue expenditure exceeding its total revenue receipts. Revenue deficit is only concerned with the revenue receipts and revenue expenditures of the government.

It is calculated as,

Revenue Deficit   = Total Revenue Expenditures – Total Revenue Receipts

Revenue deficit simply measures the difference between a projected amount of income and the actual amount of income. Thus the revenue deficit indicates that the government is dissaving.

Implications of deficits:

  • Reduction in capital assets
  • Inflationary situations
  • Larger revenue deficits cause a rise in liabilities and deficits
  • External pressures and disturbances due to economic viability

Need for balancing the deficits:

Revenue disciplines manage the public finances and thus, appears to the government’s approach to facing the deficit. Whereas, fiscal disciplines reward economies and help the government to pursue a sound economic policy. 

The Fiscal Responsibility and Budget Management Bill, 2003, has committed to take the economy towards the 3% of the GDP by 2008-09 and has been amended over a period of time. FRBM rules impose limits on both fiscal and revenue deficits.

A revenue deficit may or may not be a part of the fiscal account. Thus, the fiscal deficit is the balance of the revenue deficit that indicates whether the government is saving out of its income or spending more than it receives as current revenue.

The fiscal and revenue deficits are coterminous with each other, thus, implies some part of the borrowing to finance the current consumption which is prudential for the long term economic solutions.

Measuring deficits, taking revenue deficit into account:

  • Revenue deficit, which has been seen since the 1980s, it has been structural in India by now.
  • Considering RD in tackling fiscal disciplines, deduce the soundness of economic management.
  • While fiscal deficit, while targeting, is on reduction, the revenue deficit, in Budget 2019-20 is seen on rising.
  • Pathological adherence to the revenue account disturbing the balance of fiscal consolidation.
  • The revenue deficit in economy implies:
    • The public debt is only bound to rise,
    • We are permanently borrowing to consume, and
    • We are leaving the debts for future generations in inheritance.
  • With slowed export growth and rising unemployment rate, the revenue deficit led to crowding out the private investment.

Remedial Actions by Government to overcome deficits:

  • Borrowing or sale of existing assets (Capital Receipts)
  • Increasing tax or non-tax receipts
  • Curtail the unnecessary expenditure

International Borrowing:

With the new remedial, Government has moved towards the international market for borrowings, to meet the deficit, which was left for Public Sector organizations and the private corporate sector.

While presenting the Budget of 2019-20, the Government declared the low share of foreign debt to GDP. Considering both sides, one side where the low foreign debt to GDP causes exchange rate volatility, another side may attract a lower risk premium for Indian Sovereign Bonds 

Conclusion:

The revenue deficits overwhelm a greater part of the fiscal deficit, which we meet by borrowings and financing consumption. Therefore, unless the revenue deficit is considered coterminous with the finance account, the soundness of economic management cannot be deduced from a mere reduction in the fiscal deficit. 

moderator
By moderator July 29, 2019 15:25