The fiscal deficit which includes government’s debt (borrowing and other liabilities) could not show a sign of improvement even in the budget proposals of 2002-03. Instead, it showed a further rise in the total quantum over the previous year.
Reasons for high fiscal deficit are due to government’s commitment to pay for interests on public debt and other expenditures. According to Economic Survey, while the net fiscal deficit in 2001-02 was Rs. 1,16,314 crore, the net market borrowing was Rs. 77,353 crore. Which is estimated to finance 66% of the fiscal deficits?
The budget estimates of 2002-03 gives the fiscal deficit which is around 5.7% of gross domestic product. The Economic Survey has also pointed out that the combined fiscal deficit of both central and state governments to reach 9.6% of GDP in 2000-01 causing public debt to reach around 85% of GDP in 2000-01.
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It is also felt that stubbornness in fiscal deficit is owing to indirect effect on exchequer resulting from inadequate return from public utilities at both state and central levels. The state governments failed to collect adequate user charges from electricity, road transport, irrigation etc. Levy of charges should be adequate to cover the costs of operation but there is also need of improving operational efficiency so that services can be offered at a user-friendly price.
The high fiscal deficits, according to many, are a matter of academic interest only. Actually it is high revenue deficits which are a matter of concern for the economic situation of a country. If funds collected through fiscal deficit can be converted into productive investment which provides adequate returns commensurate with costs of borrowing, then fiscal deficit doesn’t pose any serious threat on the economic stability of a country.
But in India, this has not been the case. As fiscal deficit has increased, it has also caused higher quantum of revenue deficit. Attention must be given both for controlling fiscal as well as revenue deficit. Borrowing should be directed to proper investment so that adequate capacity is created and further capacities are utilized for ushering a growth syndrome.
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Now before highlighting further on fiscal deficits, let us look into the matter: what is revenue deficit and what is fiscal deficit. Revenue deficit is the difference between the revenue expenditure and the revenue receipts on a particular year. Upton 1978-79, the revenue receipts were more than revenue expenditure for Government of India.
Later on revenue expenditure experienced considerable increase and surpassed revenue receipts. Revenue deficits have to be financed through market borrowing by the government. The fiscal deficit is equal to borrowing and other liabilities. It measures overall borrowing required to finance government expenditure. So it is net addition to public debt.
A part of the fiscal deficit is monetized by Reserve Bank of India through holding of Treasury Bills and contribution to market borrowing programme. RBI meets government needs through running printing press and issuing fresh currency. This increases the government’s loans from the RBI, that is, the monetized deficit is the increase in the net RBI credit to the central government.
The Budget Management Bill introduced in Parliament in December 2000 envisaged that within 2006, the fiscal deficit should be brought to 2% of GDP.’ But as far as recent trend goes, the target is hardly achievable because already two budgets have been placed after the introduction of the Bill, the ratio being more than 5.5%.
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If you include finances of the State governments, the total fiscal deficit to GDP ratio would be more than 10%, and this ratio doesn’t include finances of public sector undertakings and local bodies etc. The situation is in doldrums as far as the realities stand.
The State governments have failed to take effective measures in power sector reform where hidden subsidies are around Rs. 35,000 crore, mopping up of additional resources from agricultural sector. In addition to it, there are populist measures to woo the voters such as Government of Punjab is providing free electricity to farmers. Numerous such illustrations may be cited to demonstrate the profligacy of the state governments.
The Fiscal Deficit was not reduced even in 2004-05 Union budget. It was estimated to be 4.4 of GDP in absolute terms which was Rs. 1, 37,407 crores and Non-plan expenditure. Plan expenditure was Rs. 1, 45,590 crores and non-plan expenditure was Rs. 3, 32,239 crores.
At the Central level, while there is a cry for downsizing manpower but the size of the bureaucracy has increased quite substantially in last few years. From 01.01.1998 to 01.10.2001, the number of posts of secretaries increased from 117 to 137, of additional secretaries from 99 to 110, of joint secretaries from 389 to 489, of deputy secretaries from 325 to 636, of undersecretaries from 555 to 1372.
A direct cause of increase in the government expenditure is the rise of emoluments of the Central government employees according to recommendations of the Fifth Pay Commission. The liability of the pension payment has also increased quite substantially after the Pay Commission’s recommendations. Control of expenditure by cutting wages or pension is unthinkable and tantamount to denial of justice to the government employees.
Moreover, a large chunk of human resources in private sector is getting huge amount but their counterpart in public sector is not drawing so much. The government can only take some options for pension reforms as they are contemplating following the recommendation of the working group on pension liabilities (such as transition to a funded system of pension payment for new govt, employees and a system of incentives to encourage migration of existing employees to funded systems). But this will take a long time. Meanwhile a large number of people will retire from the government services increasing the pension liabilities of the central government.
Another aspect of a large increase in government expenditure is additional allotment to the defence sector which is around Rs. 65,000 crore in the budget of 2002-03. There is an urgent need for upgradation of technology in the military forces of the country. Some experts feel that govt, should provide for lateral entry of Jawans to the paramilitary forces to control the current expenditure of maintaining military forces.
A major increase of government expenditure is owing to continuous increase in interest payment obligation and revenue inelasticity of the govt. The economic survey shows that the revenue collection of 2001-02 was not satisfactory.
That has also increased the burden of central govt. The profile of Union govt, finances in 1998-99 to 2000-01 reveals that revenue deficit as a proportion of GDP is more than 3.5% after remaining constant at 2.5% in 1995-96 and 1996-97.
Collection of revenue has been low owing to inadequate economic activities and industrial slowdown. This trend in revenue collection has been a major source of revenue inelasticity of the govt, whereas expenditure pattern is historically rigid.
A major reason of the increase in fiscal deficit is continuous rise in interest payment obligations of the government. Interest payment has been the single largest component of non-plan revenue expenditure over the years and the outcome of past borrowings.
The rising level of fiscal deficit and financing them through market borrowing has led to higher interest burden. Before 1990s when interest structure was low, a substantial part of government’s internal liability was contracted upon at lower interest rates. But a substantial portion of the govt, debt would mature soon and payment commitment of the govt would increase.
The interest rate is becoming more market related, so the cost of govt, securities is coming down, which was 13.6% in 1995-96 and is 11.0% in 2000-01. Meanwhile, interest rates on contractual savings like small savings, PPF has also increased in recent years. Interest payment in these regards has also gone up, though the interest rate structure after 1999-2000 have come down; the real rate is high above the market rate. The interest servicing has become unsustainable both by the Center and by the state which has inhibited economic growth quite substantially. Interest payment as proportion of GDP increased from an average of 3.2% during 1985-90 to an average of 4.1% during 1990-95 and climbed to 4.7% in 1999-2000.
Interest payment as a proportion of net revenue receipt grew from 30% during 1985-90 to an average of 44% in 1990-95 and close to 50% in 1995-2000. This huge interest obligation has reduced the government’s ability to spend for social sector and infrastructure development.
The only short-term solution from this situation of higher fiscal deficits lies in the fact that we have to allocate our resources in quickly maturing infrastructure projects and social sector as far as practicable. We have also to involve private sector, NGOs in developmental exercise of the country as far as possible.