Paper: III
For Prelims: Fiscal Deficit.
For Mains: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.
 
 
 
Context of News:

• In last 1 year Economy of all countries has been shattered in some form or other .In this uncertain times there is call for unconventional wisdom to go for more expenditure even at the coast of higher fiscal deficit and inflation.
• Amid all these challenging times, the Union Budget 2021-22 seems to strike the right chord as it strives to fill the huge gap created by the COVID-19 pandemic through focused and innovative approaches.
• The government had been urged to boost demand by diverse sections of policy specialists. The budget lays the roadmap for a construction-based recovery, laying thrust on infrastructure, real estate and other apex activities to generate employment.

Fiscal Deficit:

• Fiscal Deficit is the difference between the total income of the government (total taxes and non-debt capital receipts) and its total expenditure. A recurring high fiscal deficit means that the government has been spending beyond its means.
• A government experiences a fiscal deficit when it spends more money than it takes in from taxes and other revenues excluding debt over some time period. An increase in the fiscal deficit, in theory, can boost a sluggish economy by giving more money to people who can then buy and invest more.

Why Government of India is opting the Path of Higher Fiscal Defict for Economic Recovery:

• Government Believes; Higher spending leads to Higher Economic Recovery:

• Commencing a fiscal consolidation path to execute an “excessive deficit procedure” in the Union Budget 2012-22 to bring down the excess deficit of 9.5% of GDP in FY21 to 4.5% by FY26 is inevitable. However, this narrative of “deficit is good” in the time of a pandemic is welcome.
• Considering the covid-19 pandemic Situation, Indian government is going for higher spending so that our Economic recovery can happen at faster rate in V Shaped path even at the cost of the Higher Fiscal deficit.

• Post covid -19 Economic Recovery on Agenda:

• Government of India want improve the Economic situation of India at faster rate and considering the rate at which demand is spurring in India it will create a momentum for economic Recovery in India in a V Shaped manner.
• Among many developed and developing countries ,India’s Economic growth rate is very fast and to the point, so Government of India don’t want to miss this path of economic Recovery.
   

 
Why Higher Fiscal Deficit Path is Worrying Factor for India:

• Higher Fiscal Deficit leads to Inflation:

• High fiscal deficit is bad for the economy because it leads to inflation, ‘crowding out’ of private investment and so on.
• The argument regarding inflation is that when the government finances public expenditure by creating new money, it increases the stock of money in the economy. The higher stock of money, some believe, automatically leads to inflation, as ‘more money chases the same amount of goods'.

• Higher Spending leads to Excessive Burden on Citizen:

• Just like households and businesses, the government too needs to borrow to finance its excess spending over its earnings. There are mainly two ways that the government can do that:

1. By printing money (i.e. by borrowing from the Reserve Bank of India, which has the power to create new money); and
2. By borrowing from the market i.e. mainly from banks.

• However, both these factors can only create too much of problem for citizens, as the more and more money are circulating the market as a result, there will be more buyer and less of seller.

Conclusion:

• The fiscal consolidation through expenditure compression rather than increased tax buoyancy affects the quality of fiscal consolidation. From that perspective, allowing the fiscal deficit to rise above the threshold level of 3% of GDP, without significant expenditure compression, is welcome. However, the anatomy of the determinants of borrowings – decomposed by revenue uncertainties, economic stimulus-related spending, the narrowing of denominator GDP, lowering of rates of interest, etc. – would be interesting to understand with precision which components have exactly contributed to the aggregate level of high deficits.

Cleaning up of deficit incurred from off-budget liabilities through public sector undertakings is still a matter of concern. Such borrowings do not figure in the concept of fiscal deficit but this path of fiscal recovery is not sustainable in any Manner.

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