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Fiscal Deficit & Current Scenario

Fiscal Deficit  & Current Scenario

General Awareness will be tested in most of MBA entrance exams hence, MBA aspirants must update their GK or General Awareness at regular intervals.

Today,  you will read General Awareness Topic  :  Fiscal Deficit  & Current Scenario 
Fiscal deficit is the amount of total public expenditure exceeding the public revenue (excluding borrowings). Fiscal deficit is mainly measured as a percentage of total GDP. 
Government funds the fiscal deficit by issuing government bonds, treasury bills etc for which it has to pay interest. Main buyers of these government bonds or treasury bills are foreign creditors, Indian banks and financial institutions.
Budget 2012-13 sets the fiscal deficit target at 5.1 percent while the target enshrined in Fiscal Responsibility ad Budget Management (FRBM) Act 2003 was 3 percent. The government wants to limit its fiscal deficit to 5.1% of GDP in 2012-13 by controlling its subsidy bill to under 2% of GDP. 
Moreover, fiscal deficit target of 5.1 per cent of gross domestic product (GDP) was set when the government was expecting the economy to grow around 7.5 per cent in this fiscal. Since growth is going to be less than that, may be 6.5 per cent, fiscal deficit is likely to widen. Recently, Finance Minister has also stated that India would be lucky to meet a target to keep the fiscal deficit at 5.1 per cent of GDP. 
The deficit is financed through government borrowings or through printing of additional currency notes. Financing by external debt would lead to pressure on the exchange rate and by monetization would put pressure on inflation and that by domestic borrowing, on interest rates.
Of these, borrowing money is a better option because if the government were to print more notes it would increase supply of money in the economy thereby reducing its buying power and causing inflation.
Therefore, borrowing from the market is a better option as it does not alter money supply. But this too has its own disadvantages. Borrowing money from the market cannot be an endless strategy purely because there is limited money in the market and thus needs to be made available for other borrowers as well.
Too much borrowing will drive up interest rates making credit expensive and thereby affecting the overall demand in the economy. High levels of fiscal deficit relative to GDP tend not only to cause sharp increases in the debt-GDP ratio, but also adversely affect savings and investment, and consequently growth. 
Borrowing by the government often appears to be a softer option than increasing taxes or reducing expenditures. That is why, as established by international experience also, it is important to provide exogenous limits on borrowing by governments. Such limits can be exercised through fiscal responsibility legislations like FRBM Act.
In the Indian context, as far the central finances are concerned, a Fiscal Responsibility and Budget Management Act (FRBMA) was enacted in 2003. Some states have also enacted fiscal responsibility legislations. The central government has also framed rules under the FRBMA.
The FRBMA has some built-in flexibility in achieving revenue and fiscal deficit reduction targets as there is a provision that the specified limits may be exceeded ‘due to ground or grounds of national security or national calamity or such other exceptional grounds as the Central Government may specify’. The Act has also provided that ‘Reserve Bank of India may subscribe to the primary issues to the Central Government Securities’ for specified reasons.
There are several reasons why India’s fiscal deficit is likely to turn out to be higher than the projected number. Let’s start with oil subsidies. Oil subsidies for the year have been budgeted at Rs 43,580 crore.
The government has more or less run out of this money. It has paid Rs 38,500 crore to oil marketing companies (OMCs), like the Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum, for selling diesel, kerosene and LPG at a loss during the last financial year.
The Food Corporation of India buys rice from the farmers at the MSP. The food subsidy for the current financial year has been set at Rs 75,000 crore. Experts believe that this number is terribly under-provisioned given the various programmes of the government. Also, with a significant increase in the MSP of rice the food subsidy is expected to cost the government around Rs 40,000 crore more than its current estimates. Even this number is likely to be beaten because after increasing the MSP of rice significantly, a similar price increase would have to be made for wheat during the procurement  months.
What does not help is that interest payments on all the money that the government has borrowed comes to Rs 3,19,759 crore for this financial year. Other than paying interest the government also needs to repay the past debt that is maturing. This amount comes to Rs 1,24,302 crore. Hence, the cost of total debt servicing comes to Rs 4,44,061 crore, or around 87 per cent of the projected fiscal deficit of Rs 5,13,590 crore for the year. 
The government is likely to unveil measures to cut expenditure and keep deficit close to the budget estimates. The planned steps will be in addition to a hike of Rs 5 per litre in diesel prices last week. Government has also planned disinvestment in four public sector enterprises to bridge the fiscal gap. The move is expected to stoke inflation in the near term but stabilise it over a longer period. The price rise will also help to lower the government’s subsidy burden.
India has already been paralyzed by the growth fatigue and the policy paralysis. The recent measures announced by the government of reducing the subsidy, disinvestment and FDI in retail and aviation sector are small efforts meant to bring back India on a high growth path. With the growth less than 6 percent, dream of inclusive growth of UPA will remain elusive and therefore, such moves must be welcomed.