Fiscal deficit is the difference between government revenues (excluding borrowings) and it’s expenditure. Level of fiscal deficit determines the health of the public finance of the country. 

 

India's fiscal deficit is the widest among major emerging economies due to huge spending on subsidies for items such as food, fuel and fertilizer. Moreover, subdued tax revenues in a slowing economy are further aggravating fiscal strains. 

 

High fiscal deficit due to increased borrowing increases the interest rates leading to fall in investment rates. Moreover, extensive government borrowing programs crowd out the private sector from the capital market further affects the investment. Apart from this, it also strengthens the inflationary forces. 

 

The government has announced a slew of reforms since mid-September, raising the price of subsidized fuel and fertilizer, and lifting the bar on foreign investment in the airline, insurance, pensions and retail sectors to shore up the flagging economy. However, despite the recent hikes in prices of fuel and fertilizer, the government's subsidy bill is expected to remain inflated. 

 

Under a new fiscal consolidation plan, government will focus on economizing existing expenditure and reducing waste. Government is reviewing budgeted expenditure at each ministry and plans to defer some spending to the next financial year beginning in April, which could save about Rs 30,000-40,000 crore. Meanwhile, to offset sluggish tax revenues, finance ministry is banking heavily on proceeds from share sales in state-run companies.

 

The government unveiled a new plan to keep the fiscal deficit at 5.3 percent of gross domestic production (GDP) this financial year, higher than a previous target of 5.1 percent. In March 2012, the government penciled in gross market borrowing of Rs 5,70,000 crore for the 2012-13 fiscal year to help bridge a deficit earlier forecast at 5.1 percent. However, in the revised fiscal deficit target, additional market borrowing up to at least Rs 20,000 crore is likely which will exceed the target. 

 

In December 2012, the Parliamentary Committee deplored  government for it’s failure on tackling the fiscal deficit and strongly recommended that the government must take specific measures with reference to sectors/schemes to contain the deficit. It also advised the Finance Ministry to set up expert group to rationalize the existing demands of Ministries and departments with regard to Central assistance schemes, block grants and state planned schemes. The Committee sought the views of the government on the possibility of rating of Ministries based on their overall performance with regard to timely utilization of budget funds.  

 

With the next general elections due in 2014, new set of reforms are unlikely to be announced   and only modest progress is expected in fiscal and public sector reforms. Because of these factors, among others, RBI estimates revealed that the fiscal deficit is likely to be around 5.5 per cent of the GDP this financial year (instead of 5.3 percent estimated by Finance ministry), which is creating stress on the inflation front. 

 

However, recently, government revealed that it is committed to restricting fiscal deficit to 5.3 per cent this fiscal and has adequate cash balance to deal with the situation and no extra borrowing is required. 

 

The target for fiscal deficit set in Fiscal Responsibility and Budget Management Act was 3 percent but after 2010, government is consistently exceeding the target. Indeed, subsidies are essential and vital for the needs of poorest of the poor but these subsidies are getting waste in the form of leakages and corruption. Cash transfer facility, yet to start may curb this menace. With the universal application of this facility, subsidies may become better targeted. 

 

The subsidies and other non plan expenditures are essential for a welfare state like India but these expenditures must be kept within 3 percent of the GDP, otherwise, the side effects of rising fiscal deficit in the form of inflation, low income due to decreased investment will affect the poorest most for which the subsidies are designed. 

 

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