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Governing India through fiscal math
A focus on fiscal deficit reduction alone is not sound economic management. The revenue deficit must be in the picture
The fiscal discipline
• After the Budget for 2019-20 was presented one of the Finance Minister’s predecessors remarked stated that “fiscal prudence rewards economies”.
• It means, when your expenses are according to your planned expenditure and your budget, don’t suffer a deficit.
• Though concern for the size of the fiscal deficit would have been inevitable since the enactment of the Fiscal Responsibility and Budget Management Bill in 2003 and has therefore been on the radar of political parties of all persuasions at the Centre, it has been raised to special significance since 2014.
Implications of Fiscal discipline
• Fiscal discipline is understood as taking the economy towards the 3% of the gross domestic product.
• Whether the fiscal deficit should be the sole index of fiscal management and what a reduction in the deficit would achieve.
• The fiscal deficit is the right indicator of fiscal soundness of the economy.
• A sound fiscal policy is highly desirable.
• The fiscal deficit reflects the overall imbalance in the Budget.
• A fiscal deficit may or may not contain within it a deficit on the revenue account, termed the “revenue deficit”.
Revenue deficits as an indicator
• The balance on the revenue deficit that indicates whether the government is saving out of its income or spending more than it receives as current revenue.
• A revenue deficit implies that the government is dissaving.
• Unless the revenue deficit is kept explicitly in the picture, we cannot deduce the soundness of economic management from a mere reduction in the fiscal deficit.
• A steady revenue deficit as the fiscal deficit shrinks makes a mockery of fiscal consolidation.
Projection of Budget for 2019-20
• In fact, in the Budget for 2019-20, while the fiscal deficit projected is marginally lower than earlier, the revenue deficit is projected to rise.
• A revenue deficit of the Central government is relatively recent, having been virtually non-existent till the 1980s.
Implications of revenue deficit
• Revenue deficit either leads to an increase in liability in the form of borrowings or reduces the assets through disinvestment.
• Use of capital receipts for meeting the extra consumption expenditure leads to an inflationary situation in the economy Higher borrowings increase the future burden in terms of loan amount and interest payments.
• The public debt is only bound to rise; we are permanently borrowing to consume, and leaving it to future generations to inherit the debt.
• In the last Budget, the government has signalled its intention to borrow in foreign currency from the international market.
• The Government of India has so far never borrowed in the international markets, leaving it to public sector organisations and the private corporate sector to do so.
• In the Budget speech of the 17th Lok Sabha, the Finance Minister justified the move in terms of the very low share of foreign debt to GDP.
• The proposal has received criticism, some of it focuses on the consequences of exchange rate volatility.
Foreign exchange constraint
• Dollar-denominated debt has to be repaid in dollars.
• At present our reserves are fairly high but this could change.
• Oil prices variation and shift towards an increase
• The trade war by the U.S. holds little prospect for faster export growth
• Portfolio investment may flow out.
• It is important for a government to pursue a sound economic policy, including management of the public finances.
• The government should take serious steps to reduce its expenditure and avoid unproductive or unnecessary expenditure.
• The government should increase its receipts from various sources of tax and non-tax revenue.
• The balance of Fiscal deficit is also very essential.