India’s fiscal deficit may touch 9 percent of GDP within the current financial year 2020-21.
The fiscal deficit within the current year is estimated to be Rs 17.8 lakh crore, consistent with a report by Care Ratings. While the budgeted fiscal deficit within the year was Rs 8 lakh crore, a further deficit of Rs 9.8 lakh crore is projected thanks to various shortfalls and expenditure. it’s estimated that the govt will bear a burden of Rs 5.9 lakh crore as a shortfall in tax income and Rs 3.8 lakh crore as a further expenditure.
What is Fiscal Deficit?
Fiscal Deficit is that the difference between the entire income of the govt (total taxes and non-debt capital receipts) and its total expenditure.
What causes fiscal deficit?
A recurring high fiscal deficit means the govt has been spending beyond its means. Sometimes, the governments spend on handouts and other assistance to the weak and vulnerable sections of the society like the farmers and therefore the poor. A high fiscal deficit also can be good for the economy if the cash spent goes into the creation of productive assets like highways, roads, ports and airports that boost economic process and end in job creation.
Reason for current fiscal deficit
It is thanks to the dual problems with revenue loss and better spending thanks to the pandemic.
How is it calculated?
Fiscal Deficit = Total expenditure of the govt (capital and revenue expenditure) – Total income of the govt (Revenue receipts + recovery of loans + other receipts)
If the entire expenditure of the govt exceeds its total revenue and non-revenue receipts during a fiscal year , then that gap is that the fiscal deficit for the fiscal year . The fiscal deficit is typically mentioned as a percentage of GDP. for instance , if the gap between the Centre’s expenditure and total income is Rs 5 lakh crore and therefore the country’s GDP is Rs 200 lakh crore, the fiscal deficit is 2.5% of the GDP.
How is it met?
The government meets fiscal deficit by borrowing money. In a way, the entire borrowing requirements of the govt during a fiscal year is adequate to the fiscal deficit therein year.
Fiscal deficit, good or bad?
If the deficit arises because the govt has engaged in extra spending projects—for example, infrastructure spending or grants to businesses—then those sectors chose to receive the cash receive a short-term boost in operations and profitability. If the deficit arises because receipts to the govt have fallen, either through tax cuts or a decline in commercial activity , then no such stimulus takes place. Whether stimulus spending is desirable is additionally a topic of debate, but there are often little question that certain sectors enjoy it within the short run.
There are several risks also related to it
i. Fiscal deficits, spilled over, could lead on to macro-economic instability particularly if the govt resorts to deficit financing (i.e. borrowing beyond a limit and therefore the printing of latest currency);
This further jeopardises the sustainability of growth. Low levels of public -investment renders poor physical infrastructure incompatible with an outsized increase within the national domestic product.
iii. The continuing large fiscal deficits, albeit they are doing not spill over, cause macro-economic instability within the short run, requiring higher taxes to hide the burden of internal debt. High tax rates will place the country at a big disadvantage relative to other fast-growing countries by reducing the competitive strength of the domestic producers;
iv. Larger fiscal deficits have adverse effects after all of payment (BoP) too. Aggregate excess demand representing a shortage of domestic supplies spills over as accounting deficit (CAD). External loans raised to finance the CAD, ultimately results in a BoP crisis; and
v. With large fiscal deficits, even an independent monetary management cannot sustain a coffee rate of interest regime. This, therefore, impinges on a necessary condition for macro-economic stability that ‘real rate of interest must be less than the GDP growth rate’.
Current estimates of fiscal deficit
The states are at the forefront of the control and fight against the pandemic, their fiscal deficit is projected to extend by the maximum amount as 1.6 per cent over the budget estimate of two .8 per cent to 4.4 per cent of the country’s GDP. The states have the onus to effectively implement restrictions to contain the spread of coronavirus while keeping the wheels of the economy moving.
Taken together, the combined fiscal deficit within the current year could increase by the maximum amount as 7 per cent over the budget estimate. Care Ratings has expected the combined fiscal deficit to be around 13 per cent, that too, when the Rs 97,000 cr of direct borrowing by states isn’t being treated as fiscal deficit.
Since the economic activity is unlikely to revert to pre-lockdown levels within the current fiscal year , there would be a divergence in revenues and expenditure of states from what was budgeted.