As anything in excess is not good, anything in deficit is also as bad for an economy that intends to achieve inclusive growth. India has been witnessing a burgeoning fiscal deficit scenario in the past few years and the rate has worsened further with the country's fiscal deficit soaring by 64% in April 2009 as against the previous year. The present union budget will have to take strenuous efforts to reduce the growing burden if it has to ensure stability on the public finances front and achieve an optimal level of fiscal consolidation.
Fiscal deficit is an economic phenomenon, where the Government's total expenditure surpasses the revenue generated.
Off late, this particular anomaly has been fretting economies throughout the world as the great global crisis made its presence felt virtually everywhere.
In other words, mounting fiscal deficit has resulted as governments are spending beyond their means to help their respective economies emerge from the financial mayhem.
The fiscal monster has begun raising its ugly head in India as well. The enormous fiscal stimulus packages released by the Indian government by reducing different taxes and duties and also by raising expenditures have radically swelled the country's debt levels.
The cut in Cenvat rate from 14% to 10% and then to 8%, service tax from 12% to 10% and reduction in customs duty on a host of items resulted in a 17% decline in gross tax revenues.
India's fiscal deficit has been escalating in the last couple of years thanks to the global financial contagion accompanied by the largesse policies adopted by the government in the last year with the implementation of the Sixth Pay commission as well as the farm loan waiver.
S&P, a leading global rating agency has pegged India's fiscal deficit to increase 6.5% of GDP, which will be the highest in almost two decades, that is, excluding the off-budget liabilities such as fertilizer subsidies and compensation to state-run oil companies.
Together, these liabilities are estimated to be another 4% of GDP, thus taking the total deficit into double digits, which is certainly a worrisome figure.
This indeed is a matter of concern for a country like India that has managed to achieve positive growth amidst the crisis that has hammered even the most developed nations of the world.
The global financial turmoil began in 2007 with the world's largest economy, United States of America as the epicenter and later spilling into all the other economies.
This had prompted a substantial injection of capital into financial markets, fearing a credit crunch, which had begun seeing demand oozing out from economies throughout the world.
Governments and central banks throughout the globe were undertaking gargantuan borrowings to aid the economies to emerge from the mayhem, considered to be the worst since the Second World War.
Slowing growth has shrunk revenues while the unprecedented size of discretionary fiscal stimulus has bloated expenditures in most major economies.
Thus, the massive borrowing programs to spur consumption have resulted in accumulation of public debt in large quantities in most of the countries.
This has led to a situation where a secular and synchronized rise in fiscal deficit has been noted around the world.
India has been going through the issue of fiscal deficit since a couple of years. The country had witnessed some respite on the fiscal front since the reforms in 1990's and the Asian financial crisis of 1997-98.
The Indian government had undertaken fiscal reforms in 1990s as a part of economic liberalization.
Fiscal consolidation began in the early 1990s with fiscal deficit declining from 6.6 per cent of GDP in 1990-91 to 4.1 per cent of GDP in 1996-97.
However, it faltered and started deteriorating in 1997- 98 due to the Asian financial crisis and reached a level of 6.2 per cent of GDP in 2001-02.
Besides, the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 regime definitely put the country on a higher growth trajectory inspiring confidence in the medium to long term prospects of the economy.
The process of fiscal consolidation had resulted in improvement in fiscal deficit from 5.9 per cent of GDP in 2002-03 to 2.7 per cent of GDP in 2007-08.
However, the global crisis has cluttered all these good efforts and the fiscal discipline has lost over the concerns triggered by an across the board slowdown in the world economic activity.
The country had already shelled out two large stimuli in the form of the farm loan waiver and the sixth pay commission that accounted for almost 2% of the total GDP.
Last but not the least, poor monsoon conditions, would consequently lower the economy's GDP in the current financial year, making it very difficult to provide any room to improve the public finances.
The officials have downgraded the 2009 monsoon to 93% of normal which is a "below normal" figure - a cautious trimming of the "near normal" 96% forecast in April.
A delayed monsoon will hit crop production immensely, which in turn would churn poor agricultural growth numbers.
All the hopes of a recovery in the economy would be rendered meaningless if the monsoons fail to revive.
Based on the current developments on the global as well as domestic front, the upcoming budget is expected to give out a number larger than that indicated in the interim budget (5.5 per cent of GDP).
The mushrooming fiscal deficit ultimately will result in large burden on to the future generations to come with higher tax rates and higher interest rates.
The new union government has a significant role to play in reducing the country's deficit and achieving enduring stable growth simultaneously.
Ideally speaking, the budget should try and contain all the ingredients to reduce the rising fiscal burden.
A rise in government spending has resulted in a crowding out of private consumption and investment.
Thus, in order to pull out the excesses infused into the system by the next two to three years, the government could resort to disinvestment of public sector units (PSU's) in order to accrue funds for narrowing down the rapidly increasing fiscal deficit.
These large stimulus packages as well as tax cuts have made it quite implicit that India would have to witness a phase of high fiscal deficit that needs to be rightly tackled.
However, we cannot deny the political pressure that would surface for the new government refuting them to go ahead and reverse some of the cuts in indirect taxes that were introduced in the second half of last fiscal.
However, the newly elected government will have to keep their political diplomacy aside for a while and think wisely over how to reduce the burden of debt the country is undergoing.
Meanwhile, the reversal of expansionary policies are also not warranted at an hour when the main ideology for the Indian as well as other governments is to reduce burden on public and inculcate them to spend more in order for the trickle down economics strategies to work.
But again they should not fail to see the future, which would burden masses ahead with high taxation in order to earn the revenue lost in the current era.
Fiscal deficit is an economic phenomenon, where the Government's total expenditure surpasses the revenue generated.
Off late, this particular anomaly has been fretting economies throughout the world as the great global crisis made its presence felt virtually everywhere.
In other words, mounting fiscal deficit has resulted as governments are spending beyond their means to help their respective economies emerge from the financial mayhem.
The fiscal monster has begun raising its ugly head in India as well. The enormous fiscal stimulus packages released by the Indian government by reducing different taxes and duties and also by raising expenditures have radically swelled the country's debt levels.
The cut in Cenvat rate from 14% to 10% and then to 8%, service tax from 12% to 10% and reduction in customs duty on a host of items resulted in a 17% decline in gross tax revenues.
India's fiscal deficit has been escalating in the last couple of years thanks to the global financial contagion accompanied by the largesse policies adopted by the government in the last year with the implementation of the Sixth Pay commission as well as the farm loan waiver.
S&P, a leading global rating agency has pegged India's fiscal deficit to increase 6.5% of GDP, which will be the highest in almost two decades, that is, excluding the off-budget liabilities such as fertilizer subsidies and compensation to state-run oil companies.
Together, these liabilities are estimated to be another 4% of GDP, thus taking the total deficit into double digits, which is certainly a worrisome figure.
This indeed is a matter of concern for a country like India that has managed to achieve positive growth amidst the crisis that has hammered even the most developed nations of the world.
The global financial turmoil began in 2007 with the world's largest economy, United States of America as the epicenter and later spilling into all the other economies.
This had prompted a substantial injection of capital into financial markets, fearing a credit crunch, which had begun seeing demand oozing out from economies throughout the world.
Governments and central banks throughout the globe were undertaking gargantuan borrowings to aid the economies to emerge from the mayhem, considered to be the worst since the Second World War.
Slowing growth has shrunk revenues while the unprecedented size of discretionary fiscal stimulus has bloated expenditures in most major economies.
Thus, the massive borrowing programs to spur consumption have resulted in accumulation of public debt in large quantities in most of the countries.
This has led to a situation where a secular and synchronized rise in fiscal deficit has been noted around the world.
India has been going through the issue of fiscal deficit since a couple of years. The country had witnessed some respite on the fiscal front since the reforms in 1990's and the Asian financial crisis of 1997-98.
The Indian government had undertaken fiscal reforms in 1990s as a part of economic liberalization.
Fiscal consolidation began in the early 1990s with fiscal deficit declining from 6.6 per cent of GDP in 1990-91 to 4.1 per cent of GDP in 1996-97.
However, it faltered and started deteriorating in 1997- 98 due to the Asian financial crisis and reached a level of 6.2 per cent of GDP in 2001-02.
Besides, the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 regime definitely put the country on a higher growth trajectory inspiring confidence in the medium to long term prospects of the economy.
The process of fiscal consolidation had resulted in improvement in fiscal deficit from 5.9 per cent of GDP in 2002-03 to 2.7 per cent of GDP in 2007-08.
However, the global crisis has cluttered all these good efforts and the fiscal discipline has lost over the concerns triggered by an across the board slowdown in the world economic activity.
The country had already shelled out two large stimuli in the form of the farm loan waiver and the sixth pay commission that accounted for almost 2% of the total GDP.
Last but not the least, poor monsoon conditions, would consequently lower the economy's GDP in the current financial year, making it very difficult to provide any room to improve the public finances.
The officials have downgraded the 2009 monsoon to 93% of normal which is a "below normal" figure - a cautious trimming of the "near normal" 96% forecast in April.
A delayed monsoon will hit crop production immensely, which in turn would churn poor agricultural growth numbers.
All the hopes of a recovery in the economy would be rendered meaningless if the monsoons fail to revive.
Based on the current developments on the global as well as domestic front, the upcoming budget is expected to give out a number larger than that indicated in the interim budget (5.5 per cent of GDP).
The mushrooming fiscal deficit ultimately will result in large burden on to the future generations to come with higher tax rates and higher interest rates.
The new union government has a significant role to play in reducing the country's deficit and achieving enduring stable growth simultaneously.
Ideally speaking, the budget should try and contain all the ingredients to reduce the rising fiscal burden.
A rise in government spending has resulted in a crowding out of private consumption and investment.
Thus, in order to pull out the excesses infused into the system by the next two to three years, the government could resort to disinvestment of public sector units (PSU's) in order to accrue funds for narrowing down the rapidly increasing fiscal deficit.
These large stimulus packages as well as tax cuts have made it quite implicit that India would have to witness a phase of high fiscal deficit that needs to be rightly tackled.
However, we cannot deny the political pressure that would surface for the new government refuting them to go ahead and reverse some of the cuts in indirect taxes that were introduced in the second half of last fiscal.
However, the newly elected government will have to keep their political diplomacy aside for a while and think wisely over how to reduce the burden of debt the country is undergoing.
Meanwhile, the reversal of expansionary policies are also not warranted at an hour when the main ideology for the Indian as well as other governments is to reduce burden on public and inculcate them to spend more in order for the trickle down economics strategies to work.
But again they should not fail to see the future, which would burden masses ahead with high taxation in order to earn the revenue lost in the current era.
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