Fiscal deficit

Presented by
Saurabh kumar
C-48 sec-2
Difinition

• To define in terms of an economist “Fiscal

deficit is an economic phenomenon, where the
Government's total expenditure surpasses the
revenue generated”.
 Objectives…………..
→ To achieve macroeconomic goals

→ Relating to any typical problem

Macro economic goals
Economic
Employment Stabilization
Growth

Economic
equality
 BUDGET
“A budget is a detailed plan of operations for
some specific future period”

Components of budget
• Revenue receipts
• Capital receipts
• Revenue expenditure
• Capital expenditure
 Government’s revenue
• You will be surprised to know that more than
50% of the revenues of government come
from the taxes and duties. Let’s find out the
revenues of the government as per the budget
2009-10.
• Revenue receipts comprise interest and
dividends on investment made by the
government. Revenue receipts and capital
receipts together implies the government's
total cash inflow Indian Budget
Revenue Receipts

Source ministry of finance govt. of india

Capital Receipts

Source ministry of
finance govt. of India
• Revenue expenditure is a reserve of money
used by an establishment to acquire or
upgrade physical assets. Revenue expenditure
is beneficial for the current business year.
• Capital expenditure results the increase or
acquirement of an asset, whereas revenue
expenditure is necessary for the sustenance of
earning capacity
Revenue Expenditure

Source ministry of finance govt. of

india
Capital Expenditure

Source ministry of finance

govt. of india
 Sources

• Income tax (9%)

• Borrowings and other liabilities (34%)
• Non-tax revenue (12%)
• Service tax and other taxes (5%)
• Union Excise Duties (9%)
• Customs (8%)
• Non-debt capital receipts (1%)
• Corporate tax (22%)
 Taxation
Transfer of private income to public offers
by means of taxes.

1. Direct taxes- Corporate tax, Div. Distribution

Tax, Personal Income Tax, Fringe Benefit
taxes, Banking Cash Transaction Tax
2. Indirect taxes- Central Sales Tax, Customs,
Service Tax, Excise duty.
 Direct Tax

Source ministry of finance govt. of India

 Indirect Tax

Source ministry of finance govt. of India

 Government Expenditure
• Government spending on the purchase of
goods & services.
• Payment of wages and salaries of government
servants
• Public investment

• Transfer payments
Government Expenditure

Source ministry of finance govt. of India

Government Expenditure

Source ministry of finance govt. of India

 Budgetary Surplus & Deficit
• Early 1980s:net of depreciation consistently
negative.
• Late 1980s:large deficit averaging about 8% of
GDP
• Post liberalization: Fiscal deficit decreased.
• LPG effect was till 1996-1997
• 2001:Fiscal deficit increased to 10% of GDP.
• 2003:FRBM was adopted.
• FRBM improved the transparency in
budgetary policy.
• As a result fiscal deficit decreased to 3.7% of
GDP.
• In 2007-2008 fiscal deficit was 2.7 %
• Shot up to 6 % in 2008-2009.
Fiscal Deficit(as % of GDP)
Fiscal Deficit (in crores of Rs.)

Source ministry of finance govt. of india

 FRBMA Act
• The 2004-05 budget is claimed to have
adequate provisions to achieve fiscal
correction mandated
• Fiscal Responsibility and Budget Management
Act 2003 (FRBM) through enhancement of
revenue and reduction of revenue
expenditure
• Revenue deficit as a ratio of GDP should be brought down by
0.5 per cent every year ;
• The fiscal deficit as a ratio of GDP should be reduced by 0.3
per cent every year and brought down to 3 per cent by 2007-
08;
•  The total liabilities of the Union Government should not
rise by more than 9 per cent a year;
•  The Union Government shall not give guarantee to loans
raised by PSUs and State governments for more than 0.5 per
cent of GDP in the aggregate
Reasons for deficit
• Capital investments done by government.
Capital investments are those it’s worth or
value is not realized in one year. For example
the bridges, large utility buildings
• Worst cases of recession the effect of
recession on economy government had taken
many steps like reduction of interest rates, bail
outs, easing of certain rules and regulations
• Maintain stability in economy was whopping 1,86,000
crore rupees
• Some of the investments done by government which
do not yield any returns for it. Exp-food for school
children,NREGS programs etc.
• Last year the central government had to implement the
recommendations of sixth pay commission and as a
result of that it had to incur huge non-planned
expenditures
• The government increased the income tax slabs
• 3 G auction may not come in this fiscal so
35000cr revenue loss
• Debt waiver scheme
• High subsidy in crude oil prices and other
commodities
• At macro level inflation go up ,currency
weakens and growth depressed.
• Investment activity also slow down
Interest payments (as %of revenue receipts)

2004-05 41.5

2005-06 38.2

2006-07 34.6

2007-08 31.6

2008-09(RE) 34.3

2009-10(RE) 36.7
 Impact of fiscal deficit on You
• • Poor infrastructure Development
• • Lack of money supply in the economy
• • Low standard of living
• • Unemployment
• • Poverty
• • Instability in the economy
 Fiscal stimulus measures

• Reduction in excise duty by 4% and service tax

rates by 2%
• Plan expenditure was increased by upto
20,000 cr in 2008-09
• Sector specific measures like textiles housing
automobiles and SME’s exports
• Total cost of stimulus was estimated at 3% of
GDP
• With revision of base year GDP of 2008-09
estimated 55,74,449 Cr against 53,21,753 Cr
estimated in earlier series 2009-10
• If GDP growth will be 10.05% GDP market
price will be 61,59,766 Cr new series against
Rs 58,56,569 as assumed budget.
 Government expenditure
2007-08(Cr) 2008-09(Cr) 2009-10(Cr)
Employee
compensation 45963 70944 87581

Subsidies 70926 1,29,243 1,11,276

Pensions 24261 32,690 34,980

Farm debt waiver 0000 15,000 15,000

NREGS 14400 36,750 39,100

Total expenditure 7,12,671 9,00,953 10,20,838

Fiscal deficit 2.5 6 6.8

Source-economic times 1 feb

 Fiscal consolidation
• Happy news is that India’s debt-GDP ratio is
77%, but the matter to worry is that the
French debt crisis and Italian debt crisis which
happened in 1950 and 1970 were mainly due
to the domestic debt
• Fiscal consolidation is likely to be as revenue
side exercise ,difficult to cut expenditure
• FRBM ACT required government to reduce
its fiscal deficit to 3% of GDP by 2008-09
• Medium term fiscal policy statement 2009-10
pegs fiscal deficit at 5.5% of GDP in 2010-11
and 4 % of GDP in 2011-12
• It is difficult to achieving these targets to
government would cut expenditures
• Government had sought a relaxation in
meeting the target citing tough global
environment
• Roll back of cut in excise and service tax rates
and over all buoyancy could increase revenues
helping brings down deficit
• Proceeds from divestment of Govt. equity in
public sector units can help in some ways
 Future expectation
• The absolute GDP at market prices will be
61,59,766 crore in the new series, against Rs
58,56,569 cr assumed in the budget 2010-11.
• Then fiscal deficit remains at Rs 4,00,996
crore, on a higher GDP the deficit as a
percentage will drop to 6.5%
• India's fiscal deficit for April to December was
Rs 3.09 trillion ($66.9 billion), or 77.3 per cent
of the full-year target,
• Tax receipts were Rs 3.08 trillion and total
expenditure was Rs 7.08 trillion for the first
nine months of 2009-10 fiscal year
• In July, the government forecast a fiscal deficit
of Rs 4 trillion, or 6.5 per cent of gross
domestic product, for 2009-10 (April-March).