Fiscal Deficit is one term you may have heard multiple times and read everywhere while discussing the economic and monetary policies of the previous government. It is only likely that you will read about it all the more that the Budget season is here. SO here is a primer on what the term means, how evil it is and why you should care at all about what that number looks like.
What is Fiscal Deficit?
Fiscal deficit, by definition is the gap between the revenue and expenditure of the government. This revenue does not consider the government debt as the borrowings occur to ride over the deficit. Also, the government debt actually represents the deficits accumulated by the government over many years.
So is fiscal deficit always the evil it is made out to be?
No. There are two major schools of thought on this. The Keynesian school of economics believes fiscal deficit is representative of healthy dose of government incentives that are essential to boost an economy. But for the more liberal school of economics, the attempt should be made to bring this number down.
Is it important in India?
Yes. The Fiscal Responsibility and Budget Management Act was passed by the Indian parliament in 2003. The main aim of this Act is to remove revenue deficit of the government which is the result of the actual net receipts of the government fall below the expected receipts. So it is not like an actual loss of revenue to the government. The FRBM Act binds the government to fix fiscal and revenue deficit targets for itself and try and stick to those targets. So not just ideologically but even legally, the government is bound to regulate its deficit numbers.
What is the situation in India? After the first two months of April and May in the financial year 2014-15. the deficit numbers Rs 2.4 lakh crore or 45.6% of budget estimates for the whole financial year. This means the next government, with the financial reigns in the hand of Arun Jaitley will have just around half of Rs 5.28 lakh crore which was project as the deficit for the whole year. If the numbers don't mean anything to you, let us compare the number with last year. The number stood at 33.3 percent of total Budget estimates.
What is the stand of the Modi Sarkar?
Well known liberal economist and a close adviser of the Modi government Arvind Panagariya told Reuters, "In an economy where you are trying to push up the growth rate, a fiscal deficit of 4.5 percent (of GDP) is fine." This comes against the target of 4.1 percent that Chidamabarm ahd set for himself had UIPA been in power till the end of this financial year. But Panagariya says that target is unrealistic. He rather suggested that the government must push up its capital expenditure from 1.76% of GDP to 2%. For him the fiscal deficit figure need not be sacrosanct if the government can spend wisely in investment and infrastructure rather than just consumption expenditure.
Arun Jaitley, on the other hand, spoke of being hard on the deficit numbers when he would announce his Budget next week. Business Standard reported Jaitley saying in an address to the Institute of Chartered Accountants of India, that he would choose fiscal prudence over mindless populism. He made his apathy towards huge subsidy expenditures clear as well when he said if people wanted services, they would have to pay for it.
So on the Budget day, the fiscal deficit number though not always sacrosanct but will be indicative of the government's overrall taxation, investment, consumption and subsidy policies. It will be indicative of the income tax exemptions you could get, the cooking gas prices that could go up or even the newer infrastructure (like roads etc) exenditrue the government is willing to take up. That is why you should be interested in what Jaitley has to say!