FISCAL DEFICIT WRT BUDGET 2016-17

What is fiscal deficit?

• Fiscal deficit is defined as excess of total expenditure of government to the sum of total current revenue and recovery of loans and other receipts.

Q A
How is it financed?
  • It is financed by borrowing from public including banks and financial institution on the one hand and Reserve Bank of India (RBI) on the other.
  • To provide this cushion to the Central government, RBI in turn prints more currency notes.
Budget announcements wrt fiscal deficit?
  • While presenting his budget this year, the Finance Minister reiterated his resolve in last year’s budget of keeping fiscal deficit limited to 3.5 per cent of GDP in 2016-17.
Why this decision is being hailed?
  • Endeavour of the finance minister to keep fiscal deficit at 3.9 per cent in 2015-16 and his decision to keep it at 3.5 per cent in 2016-17 is being hailed in various quarters.
  • The main argument behind keeping the fiscal deficit low is that there is always a limit to borrowing from the public. Therefore borrowing from RBI becomes a necessity, which causes expansion of money supply.
  • As per principles of economic theory, increase in money supply would lead to increase in price level if not matched by increase in production. Therefore, there is a pressure on policy makers to keep fiscal deficit under check in order to keep inflation under control.
Why some critics are criticising this decision?
  • However, there are many experts who feel that it would have been prudent to raise the level of fiscal deficit.
  • This act of the finance minister could have helped him raise more resources on the one hand and helped on the other in pushing the growth up, in an economy facing the problem of deflation.
  • Those who suggest that there is a need to raise the level of fiscal deficit argue that credit off take from the banks is down significantly and broad money supply (commonly called M3) in India has been falling year after year, which is resulting in loss of liquidity in the market. There has to be sufficient availability of liquidity to foster growth. To supplement liquidity in the economy, there is a need to increase government expenditure, with larger fiscal deficit.
  • There is no theoretical basis for fixing a target level of fiscal deficit at 3 per cent.There is no theoretical basis for fixing a target level of fiscal deficit at 3 per cent.

WORD FROM TEAM GS-SCORE –

Relevant for

Economy of GS:3
For further detail Refer article titled “The economics of fiscal deficit” from Thestatesman dated march 24, 2016

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