B.A.

ECONOMICS (HONOURS)
GARGI COLLEGE,
UNIVERSITY OF DELHI
IInd year
SEMESTER IV

TERM PAPER:
RELATIONSHIP BETWEEN BUDGET
DEFICIT, INFLATION AND FISCAL
POLICY FOR INDIA

SUBMITTED TO-
GANESH MANJHI

SUBMITTED BY-
PANAV JAIN- 130527
SHUBHANGI AGARWAL-130728
SHWETA SHEKHAR 130936
TANYA JAIN 130704

AKNOWLEDGEMENT:
We would like to express gratitude towards our Macroeconomics teacher Mr Ganesh Manjhi.
Without his sincere guidance, this term paper would not have been possible.
OBJECTIVE
This study analyses the relationship between Government policies, budget
deficit and inflation in India. The main objective of this study is to examine
the factors that are responsible for increasing fiscal deficit in India, by taking
into account all factors that can affect the status of fiscal deficit by running
regression models and hypotheses testing. The study finds that inflation is not
at all cause of fiscal deficit. However, government expenditure and money
supply are found to be important determinants of increasing fiscal deficit.

Introduction
Are deficits in the government‟s budget inflationary? In the monetarist
framework, deficits tend to be inflationary. This is because when
monetization takes place, it will lead to an increase in money supply and,
ceteris paribus, increase in the rate of inflation in the long run.
Instant cause of inflation is associated with money supply ,developments in
monetary stance are indicative of other sectors of the economy. In India, it is
generally argued that fiscal imbalances might have played an important role
in explaining price fluctuation. Hence, twin problems of fiscal deficit and
inflation have been given a lot of importance in budget of Central
government in India.

The relationship between fiscal policy and inflation is the fact that fiscal
policy is a macroeconomic tool that is utilized by the government to
influence the level of economic activity in a country. Such fiscal policies are
applied to achieve a desired effect in the economy after an analysis of the
economic trends in the economy under consideration. If the analysis reveals
undesirable economic trends like inflation, the government could use fiscal
policy as one of the methods for reversing the trend or bringing it under
control.
Fiscal policy and inflation connections can be seen in the manner in which
various adjustments to the taxation scheme influences the level of inflation in
the economy. Assuming the government decides to increase the level
of income tax, this type of policy will have a wider effect that will affect
inflation levels. Such an increase in the taxation of personal income will lead
to a corresponding decrease in the total disposable or spendable income of
consumers. The assumption is that when consumers do not have as much
money to spend after the calculation of their net pay, they will make a
downward reversal in their spending and consumption habits, reducing the
aggregate demand in the economy, and also bringing down the level of
inflation.

Another connection between fiscal policy and inflation can be seen in the
effect that a contractionary, fiscal policy has on the economy. When the
government observes unwanted inflationary trends, it can arrest or reduce
such a trend by reducing its expenditure in relation to its tax revenue for the
year. In such a situation, the government limits its rate of spending. Such a
practice will serve to reduce the level of economic activity, causing a
reduction in the amount of money in the economy and reducing the level of
inflation.

Pressure may be mounting on the Reserve Bank of India from within the
country to lower interest rates, but multilateral lender International Monetary
Fund has favoured a tighter monetary policy to bring down inflation, even as
it has described the country as a "bright spot" in the world economy.

Finance Minister Mr. Arun Jaitley has said to keep fiscal discipline in mind
despite need for higher investment.
LITERATURE REVIEW
In the analysis of literature, we focused firstly about fiscal deficit and
inflation relation in general. The basic concern was, to look at the founders of
approaches or models from where we could get the basic insights.
The fiscal deficit and inflationary situation have been reviewed by many
scholars, we study their term papers and the notable points are mentioned in
the literature. As the 2015 budget just announced this is one of the hot topics
in economics.

There are a number of empirical evidences available to analyze the

relationship between fiscal deficit, money supply and inflation. Most of the
studies have analyzed how fiscal deficit and money supply affect inflation.
Very few attempts have been made to analyze the causation running from
both ways i.e., how inflation affects fiscal deficit and fiscal deficits affects
inflation. The noteworthy are Miller (1983), Agheveli and Khan (1978), and
Ndebbio (1998).

In the theory of economics according to the classical view, which is related to

the quantity theory of money (QTM), fiscal deficits cause inflation because
governments that run persistent fiscal deficits tend, over time, to resort to
money creation to finance the deficit. On the other hand, according to more
recent studies leading to a fiscal theory of price level(FTPL), money creation
is not the only factor through which fiscal policy becomes the leading factor
and budget deficits cause inflation. In the other words, FTPL theory says that
a fiscal dominant(i.e., non-Ricardian situation) regime may arise when fiscal
policy is not sustainable and government bonds are considered net wealth
(Woodford, 1998). These wealth effects could endanger the objective of price
stability, irrespective of central bank commitment to down inflation. Thus
according to the FTPL theory it is fiscal, not monetary, policy that determines
the price level.
Hamburger and Zwick (1981) argued from the monetarist view that budget
deficits can lead to inflation, but only to the extent that they are monetarized.
Hence, according to the monetarist (and neo-classical) approach, changes in
the inflation rate is highly correlated to changes in the money supply.
Normally, the budget deficit on its own does not cause inflationary pressures,
but rather affects the price level through the impact on money aggregates and
public expectations, which in turn trigger movements in prices. Hence, the
monetarist view postulates that abiding and persistent growth of prices is
necessarily preceded or accompanied by a sustained increase in money
supply and therefore, in the present study we have focused on this aspect and
limited ourselves to the monetarist approach.

Dwyer (1982) explained that the most direct connection between government
deficits and inflation is that by increasing the real value of outstanding bonds
and perceived net wealth, a deficit can raise total spending and the price level
because the economy is operating at full employment.

Empirically, inflation results in widening fiscal deficit which are often

financed through the banking system leading to excessive liquidity in the
system and thus generating inflation. Hiller noted that inflation raises the cost
of government services and investments and increases budgetary demands for
distributional transfer while simultaneously increasing, the amount of
revenue collected. Furthermore, Blejar and Khan confirmed the two way
causation between fiscal deficit and inflation noted that “fiscal deficit
whether financed from borrowing from the public or the banking system are
necessarily inflationary.”

Tiwari and Tiwari (2011) examined the linkage between fiscal deficit and
inflation in India by taking into account all factors that can affect the status of
fiscal deficits. They found that inflation is not at all cause for the fiscal
deficit. However, government expenditure and money supply were found to
be important determinants of mounting fiscal deficit.
Pandey (2012) has made an attempt to test the direction of causality among
government expenditure, inflation, money supply and fiscal deficit. His
approach suggests that both government expenditure and money supply cause
fiscal deficit while standard causality test indicates that only government
expenditure cause fiscal deficit. And money supply cause government
expenditure and fiscal deficit cause money supply. Further, the most
interesting one, he found that inflation does not cause any of the test variable
included in the model and no variable included in the model cause fiscal
deficit.

IMF working paper by Luis Catao and Marco E. Terrones(April 2003) has
sought to address the issues of fiscal deficit. In their research fiscal deficits
have been shown to matter not only during high and hyperinflations but also
under moderate inflation ranges, even though the effects are substantially
weaker.

Deficit-inflation relationships are surprisingly found to be more stronger.

However, on the other hand they did not detect any positive and strong
connection between deficits and inflation in advanced economies and low-
inflation countries. They also describe the reason for the same. Regarding the
low-inflation group, since half of its constituents consist mostly of very
small, open economies with longstanding hard pegs or those that have given
up their national currencies altogether, the assumption of fiscal dominance
underlying the theory is either severely weakened or nonexistent. Last this
paper has also shown that the statistically significance of the fiscal deficit-
inflation relationship in most countries is relatively robust to alternative
specification.
THEORY
WHAT IS BUDGET DEFICIT?
When the government expenditure exceeds revenues, the government is
having a budget deficit. Thus the budget deficit is the excess of government
expenditures over government receipts (income). When the government is
running a deficit, it is spending more than it's receipts.
The government finances its deficit mainly by borrowing from the public,
through selling bonds, it is also financed by borrowing from the Central
Bank.

Types of Budgetary Deficit ↓

The different types of budgetary deficit are explained in following points :-

1. Revenue Deficit
Revenue Deficit takes place when the revenue expenditure is more than
revenue receipts. The revenue receipts come from direct & indirect
taxes and also by way of non-tax revenue.The revenue expenditure
takes place on account of administrative expenses, interest payment,
defence expenditure & subsidies. It is currently 2.8% of GDP

2. Budgetary Deficit
Budgetary Deficit is the difference between all receipts and expenditure
of the government, both revenue and capital. This difference is met by
the net addition of the treasury bills issued by the RBI and drawing
down of cash balances kept with the RBI. The budgetary deficit was
called deficit financing by the government of India. This deficit adds to
money supply in the economy and, therefore, it can be a major cause of
inflationary rise in prices.
3. Fiscal Deficit
Fiscal Deficit is a difference between total expenditure (both revenue
and capital) and revenue receipts plus certain non-debt capital receipts
like recovery of loans, proceeds from disinvestment.
In other words, fiscal deficit is equal to budgetary deficit plus
governments market borrowings and liabilities. This concept fully
reflects the indebtedness of the government and throws light on the
extent to which the government has gone beyond its means and the
ways in which it has done so. It is currently 3.9% of GDP.

4. Primary Deficit
The fiscal deficit may be decomposed into primary deficit and interest
payment. The primary deficit is obtained by deducting interest
payments from the fiscal deficit. Thus, primary deficit is equal to fiscal
deficit less interest payments. It indicates the real position of the
government finances as it excludes the interest burden of the loans
taken in the past.

5. Monetised Deficit
Monetised Deficit is the sum of the net increase in holdings of treasury
bills of the RBI and its contributions to the market borrowing of the
government. It shows the increase in net RBI credit to the government.
It creates equivalent increase in high powered money or reserve money
in the economy.
INFLATION TRENDS IN INDIA:
We know that overtime prices fluctuate of every commodity. Inflation can be
defined as a rise in the general price level and therefore a fall in the value of
money. Inflation occur when the amount of buying power is higher than the
output of goods and services. Inflation also occurs when the amount of
money exceeds the amount of goods and services available.

 Factors affecting inflation:

 Supply side factors: the supply side factors are the key
ingredient for the rising inflation in India. The agricultural
scarcity or the damage in transit creates a scarcity causing high
inflationary pressures. Similarly, the high cost of labor eventually
increases the production cost and leads to a high price of the
commodity.
 Demand side factors: Demand side factors are basically occurs
in a situation when the aggregate demand in the economy has
exceeded the aggregate supply. In the Indian context it occurs
with the agrarian society where due to droughts and floods or
inadequate methods for storage leads to lesser or deteriorated
output.
 Domestic factors: There are some domestic factors also which
affect the inflation. In India we have lesser developed financial
market which creates a weak bonding between the interest rates
and the aggregate demand.
 External factors: external factors include exchange rate
determination. The liberal economic perspective in India affects
the domestic price.
  Effects of inflation:
Hoarding
Increased risk
Fixed income recipients
Lowers national saving
Illusions of making profit
Rising prices of imports
Causes business cycles to go out of business

Relationship between fiscal deficit and public debt:

Government sometimes cannot finance their budgets entirely using their
revenues alone, they have to borrow some money in order to do that. Such
money that is borrowed by the government to finance its operations is what is
referred to as public debt. Public debt can be borrowed from a number of
sources. One such source is local investors. Alternatively, the government
can borrow such money from other governments. If such debt is owed by a
country to another country, and if the money is given in form of foreign
currency, then such a debt in economics is referred to as a sovereign debt.
public debt is not a flow concept. It is a stock concept and hence measured at
a particular time i.e., end of the year. Intuitively, when fiscal deficit increases
government needs to borrow more money to balance the budget, therefore
increasing the public debt.

Relationship between fiscal deficit and Taxes

A key problem with trying to balance the budget with tax increases is that
higher taxes fuel more spending. Milton Friedman explained the problem:
“Raise taxes by enough to eliminate the existing deficit and spending will go
up to restore the tolerable deficit.”Another reason that tax rate increases do
not succeeding balancing the budget is that they shrink the tax base by
reducing economic growth and spurring greater tax avoidance. As a result,
the government typically gains only a fraction of the revenues it hopes to
receive.
In the theory of economics according to the classical view, which is rooted in
the quantity theory of money , fiscal deficits cause inflation because
governments that run persistent fiscal deficits tend, over time, to resort to
money creation to finance the deficits. Normally, the budget deficit on its
own does not cause inflationary pressures, but rather affects the price level
through the impact on money aggregates and public expectations, which in
turn trigger movements in prices.

Relationship between Fiscal Policy And

Government Expenditure
According to Keynesian approach, Government spending may increase the
aggregate demand which further stimulates the economic growth and
employment. Many studies show that government spending is positively
related with economic growth. While increase in government spending may
lead to fiscal deficit, but if government reduces their expenditure it may
adversely affect the economy. But the excess of government expenditure due
to the current expenses or unproductive use over the taxes collection capacity
of economy creates fiscal deficit.
A major part of expenditure is financed by the borrowings from several
sources like the world bank, IMF and other nations which constitute the fiscal
deficit.

Relationship between fiscal deficit and inflation:

Macroeconomic theory postulates that fiscal deficit cause inflation. A well-
established theory in macroeconomics is that fiscally dominant governments
running persistent deficits have sooner or later to finance those deficits with
money creation (seigniorage), thus producing inflation. The “fiscal view” of
inflation has been especially prominent in the developing country literature
like India, which has long recognized that less efficient tax collection (the
basic problem in Indian context), political instability, and more limited access
to external borrowing tend to lower the relative cost of seigniorage and
increase dependence on the inflation tax.
Reserve Bank of India (RBI) propagated a theory which says that there is
excess demand in the economy, leading to price rise. In other words, this is
„demand-pull inflation‟. That excess demand needs to be squeezed out of the
economy by reducing government spending and maintaining high interest
rate. This theory proved that the “fiscal view” of inflation is valid in India.
And hence, it can be concluded that there is a positive relationship between
fiscal deficit and inflation.

FISCAL POLICY
The fiscal policy is basically the revenue generating policy of the
Government. Inflation and fiscal policy affects the level of economic
activities of a country. Fiscal policy is the Government's expenditure policy
that influences macroeconomic conditions.
The government finances expenditures on the basis of this fiscal policy. The
two methods of financing are

 Taxation- Taxation can be of several forms like taxation of personal

and corporate income, value added taxation and the collection of
royalties
 Borrowing- A government not having sufficient tax revenue to finance
its expenditure, borrows money to provide goods and services to it's
people. The government borrows money through the issuance of
securities.

In India growing deficit, not only deserves concern, but the composition of
this deficit and the way it is being financed deserve concern because, the
impact of fiscal deficit depends on it.

Growing revenue deficit in India is a major concern because more and more
revenue deficit implies pre-emption of private saving for government current
consumption which tends to crowd out private investment without
corresponding increase in capital spending by the government. It is also
recognized that since the 1990s primary deficit has turned negative, implying
that states are borrowing to meet their current expenditure or significant part
of the fiscal deficit is due to the burden of the serving the past debt.

Widespread deterioration in fiscal position with associated impact on fiscal

sustainability, macroeconomic vulnerability and economic growth led an
emerging, consensus to adopt fiscal reform to improve fiscal responsibility.
In 2003 the Central Government of India enacted Fiscal Responsibility and
Budget Management (FRBM) Act on the presumption that fiscal deficit is the
key parameter adversely affecting all other macroeconomic variable. It put
statutory ceilings on Central Government‟s borrowings, debt and deficits.
Now all the major States have enacted Fiscal Responsibility Law except West
Bengal and Sikkim.

Impact of fiscal policy is on

• interest rates,
1

• tax rates.
2

• government spending strategy.

3

Economic effects of fiscal policy

The fiscal policy has the power to affect the level of overall demand in the
economy. The primary objective of fiscal policy is to

Maintain the price stability,

Economic growth
Employment of the country.
An appropriate fiscal policy can help in combating rising inflation
rates.
RESEARCH
QUESTION AND
HYPOTHESIS
There is no agreement among economists either on the methodological
grounds or on the basis of empirical results whether financing government
expenditure by incurring a fiscal deficit is good, bad, or neutral in terms of its
real effects
Based on the neoclassical perspective, we are able to come to the point that,
if economic resources are fully employed, increased consumption necessarily
implies decreased saving. Interest rates must then rise to bring capital
markets into balance. Thus, persistent deficits crowed out private capital
accumulation.

REGRESSION EQUATION:

( Fiscal Deficit)t= α+β1 (Inflation)t+β2 (tax) +β3 (Government

Expenditure) + β4(Public Debt)

Hypothesis (conjecture) formulation:

H10 : β1 = 0(There is a no impact of inflation or cpi on Fiscal deficit)

H11: β1> 0 (Inflation increases fiscal deficit i.e there is a positive
impact of inflation on Fiscal deficit.)

In general, inflation has raising effect on budget deficit by raising nominal

interest rate. According to Fischer Effect, nominal interest rate consists of
real interest rate and expected inflation rate. If the inflation expectation
increases, it causes to rising nominal interest rate which leads to the public
debt to go up. Interest payment covers the big part of public payment in
developing countries. If interest rate increases because of inflation, it leads to
raise interest payment as well as budget deficit by causing the Debt/GDP
ratio to increase and thereby increases fiscal deficit. There are many other
channels through which inflation influences the real budget deficit.

H20 : β2 = 0. (There is a no impact of taxes on Fiscal deficit)

H21: β2< 0 (TAXES reduces fiscal deficit i.e there is a negative impact
of taxes on Fiscal deficit deficit)

Ironicall, Şen (2003) found that high inflation cause to decrease in tax
revenue in crisis time and low level of tax revenue cause to tax loss which
leads to high budget deficit.

H30 : β3 = 0. (There is a no impact of government expenditure on Fiscal

deficit)

H31: β3> 0 (There is a positive impact of government expenditure on

Fiscal deficit deficit)

In general, increase in government expenditure (either because of operation

of Wagner‟s law or otherwise) will increase fiscal deficit if revenue is not
generated in the same proportion. However, there are other reasons also due
to which government expenditure can increase fiscal deficit even after raise
in tax revenue due to deficient and inefficient social programs. Further,
increasing public spending leads to increase in budget deficit. This
disequilibrium results from governments‟ wrong policies such as using
borrowing in order to finance the deficit.
 H40 : β4 = 0 (There is a no impact of public debt on Fiscal deficit)
H41: β4> 0 (Public debt increases fiscal deficit i.e there is a positive
impact of taxes on Fiscal deficit.)

Public borrowing can thus offset the rise in saving and fall in spending which
threatens a recession. Intuitively, when fiscal deficit increases government
needs to borrow more money to balance the budget, therefore increasing the
public debt. Also as the public debt increases an increased amount of interest
has to be paid for the increased borrowing. This further leads to an increase in
the amount to be borrowed to finance the public debt. Hence public debt
forms an important part of fiscal deficit analysis.

H50 : R square = 0 (All the variables does not explain a significant

portion of variation in the fiscal deficit. The model is useless)

H51: R square> 0 (All the variables collectively explain a significant

portion of the variation in Fiscal Deficit.)

This hypothesis is tested to establish the usefulness of the model used for the
empirical analysis. It also establishes whether the explanatory variables
(government expenditure, taxes, inflation and public debt) explain a
significant portion of the variation in the fiscal deficit. If the null hypothesis
is rejected then it means the model is a good fit. If it‟s not rejected it means
the model is useless and a new model needs to be found.
 H60 : JB = 0 ( The variable‟s Ui‟s has a normal distribution )
H61: JB> 0 (Variable‟s Ui‟s does not have a normal distribution)

This hypothesis is tested to find out whether Uis of the variables in the study
are normally distributed or not. If the H60 is accepted then Ui‟s are normally
distributed if H60 is rejected then Ui‟s are not normally distributed . If the
Ui‟s of a variable is normally distributed then the variable‟s distribution will
also be normally distributed.
DATA AND
METHODOLOGY
DATA ANALYSIS METHOD
Various statistical methods have been employed to compare
the data. Descriptive statistics used to test the sample characteristics. Time
series analysis was also carried out to identify the trends over the last forty
years. It includes regression analysis, Correlation analysis and independent
sample one-way ANOVAs (f-test). Regression analysis is used to find out the
significant impact of government expenditure, inflation, taxes and public debt
on fiscal deficit.( Eviews - 5 versions have been utilized in this study
We have used a multiple regression process for exploring the relationship of
four predictive variables as they relate to the dependent variable of this
quantitative study along with checking the two variable models.

TREND ANALYSIS OF FISCAL DEFICIT

6000

5000

4000

3000

2000

1000

0
75 80 85 90 95 00 05 10

FD

In the initial years FD of our country was very low, while subsequently in
recent years it can be seen that fiscal deficit is way to higher prevalent in the
country. This can be attributed to be for many reasons further analyzed in the
term paper as increase in prices (inflation),increase in government
expenditure as compared to taxes over the years leading to deficit and also
due to increase in public debt which means increase in borrowing leading to
an increase in payments.

GRAPH SHOWING THE INFLATION TRENDS

16

12

0
94 96 98 00 02 04 06 08 10 12

INF

ANALYSIS: As the graph is showing the inflation is highly fluctuating in

India. “As growth is not uniform in different growth sectors, maintaining
absolute price stability meaning zero rate of increase in prices, may not be
possible and nor it is desirable.”
Inflation is highest in year 1998 which is 15.37%. Current inflation in India is
around 5.5% driven by higher food prices. Inflation rate in India averaged
8.78% from 2012 to 2015, reaching on all time high of 11.16% in November
of 2013 and a record of 4.38% in November of 2014. Inflation rate in India
is reported by the Ministry of Statistics and Programme Implementation
(MOSPI), India.
CPI AND FD TRENDS OVER THE YEARS

Refer: Table 3 in appendix

In the initial years inflation was higher than FD of our country, while
subsequently in recent years it can be seen that fiscal deficit is way to higher
than the cpi prevalent in the country. The fluctuation in FD has been more as
compared to that of fiscal deficit. But still both variables are moving in the
same direction, a sharp dip in CPI is accompanied by a dip in FD too, while
as FD has started increasing, cpi has also increased.
FISCAL DEFICIT AND CPI

As the scatter plot is showing there is almost a positive relationship between

inflation and fiscal deficit. As the CPI is higher for the corresponding years
FD has also been high. In no year we see a drop in FD accompanied by a rise
in CPI and vice versa.
This graph shows the fitted sample regression line for the data taken. It has a
slight positive slope. As the conditional mean values of FD for given values
of CPI is quite far it can be stated that this model value is not a quite good
one.

SCATTER PLOT OF FISCAL DEFICIT AND PUBLIC DEBT

5
FD

2
40 45 50 55 60 65

PD

As the scatter plot is showing there is no perfect relationship between public

debt and fiscal deficit. However later on when we include other variables to
the model we will see that public debt affects the fiscal deficit jointly with
other variables.
LINE GRAPH OF FISCAL DEFICIT (FD) AND PUBLIC DEBT(PD)
70

60

50

40

30

20

10

0
92 94 96 98 00 02 04 06 08 10 12

FD PD

Refer: Table 3 in appendix

Similarly, line graph of fiscal deficit and public debt does not show a perfect
relationship between them. However if we do the analysis of public debt of
past few years, public debt is highest in year 2003 i.e., 61.5% and lowest in
2012 i.e., 43.7%. a similar analysis for fiscal deficit shows that fiscal deficit
is highest in 1994 and lowest in 2008.
FISCAL DEFICIT AND GOVERNMENT EXPENDITURE
70000

60000

50000

40000

30000 Fiscal D.

20000 govt exp

10000

Refer: Table 2 in appendix

We can clearly find a huge fluctuation in the fiscal deficit of India in the 39
observations taken. This might be due to political instability and market
fluctuations. The Government expenditure is less varied vis-à-vis fiscal
deficit in the 34 years. The highest government expenditure was observed in
the financial year of 2013-14 when a new Government came into power and
the lowest in 1975-76.The new Government in its budget has targeted to keep
the fiscal deficit under control by curtailing it’s certain expenditures like in
health and education.
SCATTERPLOT OF FISCAL DEFICIT & GOVERNMENT EXPENDITURE

70000

60000

50000

40000
Fiscal D.
30000
govt exp
20000

10000

0
0 10 20 30 40 50

We cannot find a perfect relationship between fiscal deficit and government

expenditure, which is required to avoid the problem of multi-colinearity.
There is a positive relationship between government expenditure and fiscal
deficit as per our empirical analysis.

FISCAL DEFICIT AND TAXES

9000
8000
7000
6000
5000
4000 Fiscal D.
3000 taxes
2000
1000
0

Refer: Table 1 in appendix

We can find a positive relationship between fiscal deficit and taxes but
not perfect relationship. Both the fiscal deficit and taxes are found to be
highest in the year 2013-14.

SCATTER-PLOT: (FISCAL DEFICIT AND TAXES)

9000
8000
7000
6000
5000
Fiscal D.
4000
taxes
3000
2000
1000
0
0 10 20 30 40 50

Since there seems to be no perfect relationship between the two variables.

But the relationship is positive as per our graphical analysis. As fiscal deficit
increases the taxes have also been increasing. In no year has this positive
relationship seen a deviation.
DESCRIPTIVE STATISTICS
The distribution of the 2 data sets can be well seen graphically by the bar
chart diagram.
FISCAL DEFICIT AND CPI

CPI ON FD
Comparatively standard deviation is quiet less than that of fiscal deficit.
Hence it can be stated that over the years fluctuation in inflation has not been
as drastic as that with fiscal deficit about it‟s mean expected value.

Jarque Bera

H60 : JB = 0 ( The variable has a normal distribution )

H61: JB> 0 (Variable does not have a normal distribution)

This statistic can be used to test a null hypothesis where each variable is
considered to have a normal distribution.
The results in the table show that the data do not support the supposition that
each variable has a normal distribution, since the null hypothesis that each
variable has a normal distribution is rejected based on a p-value 0.0000
This is also evident from the fact that neither the skewness of the data is near
0 nor is the kurtosis of either near 3. So H60 : JB = 0 is accepted for CPI and
FD.
Both of the distribution is slightly positively skewed this is evident from the
the Bar Graph as well as the co-efficient (+1.3688118 and +1.712191)
There is a positive correlation between FD and CPI this is consistent with our
theory of a positive relationship between the two.

The covariance is high between inflation and FD is also high as much as

6355.

Fiscal Deficit and Government Expenditure:

Variable Obs Mean Std. Dev. Min Max

fiscald 39 1095.355 1511.907 13.64 5160.42

govtexp 39 14066.79 16872.1 683.14 64850.37

We see that the mean of fiscal deficit is 1095.355 approximately with a

remarkable variation of 1511.907. The mean value of Government
Expenditure is 14066.79 in India which is quite high. And the variation
observed is equivalent to 16872.

FISCAL DEFICIT AND TAXES

Variable Obs Mean Std. Dev. Min Max

fiscald 39 1095.355 1511.907 13.64 5160.42

taxes 39 1692.435 2216.942 60.1 8360.26

We find that the mean value of fiscal deficit in the 39 years is 1095.35
whereas that of tax revenue is about 1692.44.
The variation found in fiscal deficit is around 1511.907 whereas in case of
taxes we can see a huge variation of 2216.94 mainly due to economic growth
and political instability. The highest tax collected was 8360 in 2013-14
financial year.

FOR MULTIPLE VARIABLE

Date: 03/19/15

Sample: 1980 2012

CPI GE FD PD TR

Mean 569.7576 14535.99 1135.101 68.10273 1735.662

Median 513.0000 9286.290 463.9400 68.85000 937.0100
Maximum 1381.000 57720.60 5141.030 83.23000 7418.770
Minimum 256.0000 1180.680 45.91000 47.94000 93.58000
Std. Dev. 294.6317 15158.34 1419.770 8.917924 2008.870
Skewness 1.250182 1.393295 1.699976 -0.528365 1.415995
Kurtosis 3.756496 4.112396 4.742455 3.074065 3.894997

Jarque-Bera 9.383152 12.37846 20.06926 1.542974 12.12913

Probability 0.009172 0.002051 0.000044 0.462325 0.002324

Observations 33 33 33 33 33

THE DISTRIBUTION OF THE SETS CAN BE INTERPRETED

AS:JARQUE BERA
The result for CPI and FD have already been explained above.
The results in the table further shows that government expenditure, and tax
revenue are not normally distributed at all levels of significance
(H60 : JB = 0 rejected at 5%, 1 % and 10%)
But public debt is normally distributed at any level of significance.
The coefficients except for the case of public debt show correct sign.
(H60 : JB = 0 excepted at 5%, 1 % and 10%)
This may be due to the presence of multi- co- linearity.
CORRELATION MATRIX
CPI FD GE PD RESID TR

CPI 1.000000 -0.134952 -0.176565 -0.026624 7.72E-15 -0.158494

FD -0.134952 1.000000 0.969532 0.227698 0.198023 0.949771
GE -0.176565 0.969532 1.000000 0.295014 4.83E-15 0.992024
PD -0.026624 0.227698 0.295014 1.000000 6.76E-15 0.258252

The correlation matrix gives a great view on the relationship shared

between variables. Our empirical analysis shows that

There is negative relation between CPI and FD here and even with
government expenditure. Also there is negative relation between public
debt too here with CPI. This may be because here CPI is independent
variable which leads to does not comply with the theory.
While with FD there is positive relation between government expenditure
and Public debt. In detail

CPI has

a. A negative relationship with FD (-0.13495)

b. A negative relationship with Government expenditure (-0.176565)
c. A negative relationship with Public Debt (-0.026624)
d. A negative relationship with Tax Revenue (-0.158494)

Fiscal Deficit has

a. A negative relationship with Government expenditure (0.9695)

b. A negative relationship with Public Debt (0.0227)
c. A negative relationship with Tax Revenue (0.94)(this contradicts our
theory as ideally the relationship is expected to be positive)
Government expenditure has

a. A negative relationship with Public Debt (0.295)

b. A negative relationship with Tax Revenue (0.99) ( It is because of this
issue that we might face the issue of multi-co-linearity further)

COVARIANCE MATRIX

CPI FD GE PD TR

CPI 84177.27 -54740.87 -764665.0 -67.83570 -90966.03

FD -54740.87 1954664. 20233343 2795.608 2626786.
GE -764665.0 20233343 2.23E+08 38671.71 29292838
PD -67.83570 2795.608 38671.71 77.11940 4486.370
TR -90966.03 2626786. 29292838 4486.370 3913269.

The Covariance comes from correlation and so it can be seen it has complied
with the above correlation. It shows the same relation as above and tells one
how one variable varies with another.
RESULT AND
ANALYSIS
REGRESSION OF FISCAL DEFICIT (REFER TO R1 IN APPENDIX)
REGRESSION EQUATION:

( Fiscal Deficit) = -134.8355 + 0.087454(Government Expenditure)

If we regress fiscal deficit on Government expenditure, the p value of F-

statistic is coming to be 0.00.So we can reject the null hypotheses at any level
of significance. And hence our findings are significant.
Also, we can notice the relationship between fiscal deficit and Government
Expenditure using the value of R squared of 0.95.This means 95% variation
in fiscal deficit is being explained by government spending. We need to take
more variables in to consideration while describing this model.

REGRESSION OF FISCAL DEFICIT ON PUBLIC DEBT INTERPRETATION (R2

IN APPENDIX)

REGRESSION EQUATION:

( Fiscal Deficit) = 9.130019 - 0.0732300 (Public Debt)

When we regress fiscal deficit on public debt, the p-value of F-statistic is

0.083 so we can reject the null hypothesis at 10% significance level.
And hence, our findings are significant at 10% level. The r-
squared(0.142) and adjusted r-squared(0.099) values show that there is a
weak relationship between fiscal deficit and public debt. And hence one
of the possible reasons for it may be that our model is not correctly
specified.
INTERPRETATION OF FISCAL DEFICIT AND TAXES (R3)

REGRESSION EQUATION:

( Fiscal Deficit) = -15.18406 - 0.656178 (tax)

If we regress Fiscal deficit on taxes, we get a p-value of F-statistic equal

to 0.00 which is extremely low and so we can reject the null hypotheses
as any three level of significance. Thus our findings are statistically
significant at any of the three level of significance. The value of R
squared is 0.92, it means 92% variation in fiscal deficit is being
explained by taxes. Hence in order to increases our R square we need to
add more relevant variables impacting fiscal deficit.

INTERPRETATION OF FD ON CPI (R4)

REGRESSION EQUATION:

(Fiscal Deficit) = 1051.747 + 0.080328(Inflation)

The study regress FD on CPI to find out impact of CPI on deficit in India.
The model uses OLS technique. The results can be interpreted as follows.

 Durbin-Watson (DW) statistic( test of 1st order serial co-rrelation) ---

The DW statistics is 0.093813 ,which means there is presecnce of auto
correlation in the error term.
 The R-squared value is 0.000229, which states that CPI individually
can explain only 0.0229% of variation in Fiscal Deficit. Hence it would
be rightful to state that inflation is alone not a major cause of higher
fiscal deificit.
  The constant term is 1051.747which states that if there is zero inflation
in the economy then Fiscal Deficit would still be 1051.747 on an
average.
The t-statistic is the reported t-value corresponding to the null hypothesis that
c(i) = 0 for i = 1, 2. Based on this calculated value and appropriate critical
values from the t-table, we will either reject or fail to reject the null
hypothesis at some chosen level of significance. The p-values provide us with
an alternative way of testing this null hypothesis.

 The null hypothesis that this constant is 0 can be rejected at even 5%

level of significance as the probability value of it‟s “t-statistic” is
0.0561. Hence this constant value will always be significantly different
from zero.
 The estimated co-efficient of CPI is positive (0.080328), Economic
theory suggests that this is what we should expect. Inflation has a
positive impact on FD (as inflation grows deficit of economy.)
 This also states that a 1 point increase in inflation would lead to a
0.080328 points increase in Fiscal Deficit on an average.
Note: In EViews the p-values for this t-test assumes a two-sided alternative
hypothesis, so these values should be halved if you have a one-sided
alternative. Hence we follow a 1 tail test as the economic theory states our
alternative hypothesis ( for inflation and cpi) has to be a 1 sided test.

 Hence the probability value of “t-statistcs” of CPI is seen to be 0.46.

This states that we can reject the null hypothesis that inflation‟s impact
on FD is not significance even at 1% level of significance.
INTERPRETATION OF CPI ON FD (R5)

REGRESSION EQUATION:

(Inflation) = 539.745 + 0.002854 (Fiscal Deficit)

The study regresses CPI on FD to find out impact of deficit on the inflation
and general price level in India. The model uses OLS technique. The results
can be interpreted as follows.

 Durbin-Watson (DW) statistic( test of 1st order serial co-relation) ---

The DW statistics 0.450843,which means there is presence of auto
correlation in the error term.
 The R-squared value is 0.000229, which states that FD individually
can explain only 0.0229% of variation inflation. Hence it would be
rightful to state that FD is alone not a major cause of higher inflation.

 The constant term is 539.7459which states that if there is zero FD in the

economy then CPI would still be 539.7459on an average.
 The null hypothesis that this constant is 0 cannot be rejected at 5%
level of significance as the probability value of it‟s “t-statistic” is
0.0000. Hence this constant value will not be significantly different from
zero.
 The estimated co-efficient of FD is positive (0.002854), Economic theory
suggests that this is what we should expect. FD has a positive impact
on Inflation (as inflation grows deficit of economy.)
 This also states that a 1 point increase in FD would lead to a 0.002854
points increase in inflation on an average.
We again follow a 1 tail test as the economic theory states our alternative
hypothesis ( impact of FD on inflation should be positive) . So it has to be a 1
sided test.
  Hence the probability value of “t-statistcs” of FD is seen to be 0.46.
This states that we can reject the null hypothesis that inflation‟s impact
on cpi is not significance even at 1% level of significance.
And hence our result shows that inflation does impact fiscal deficit but as the
amount of variation explained by it is really low we need to add more
variables to our model. Possibly we have to solve a specification bias issue in
our model.

INTERPRETATION WHEN FD AS DEPENDEND VARIABLE (MULTIPLE

REGRESSION (R6)
The general purpose of multiple regressions is to learn more about the
relationship between several independent or predictor variables and a
dependent or criterion variable
The study regress FD on CPI, GE,,PD, and TR to find out impact of all these
variables on deficit in India. The model uses OLS technique. The results can
be interpreted as follows.
Dependent Variable: FD
Method: Least Squares

Sample: 1980 2012

Included observations: 33

Variable Coefficient Std. Error t-Statistic Prob.

CPI 0.280124 0.185327 1.511507 0.1419

GE 0.191776 0.029766 6.442810 0.0000
PD -16.70020 6.522082 -2.560562 0.0161
TR -0.738632 0.221396 -3.336243 0.0024
C 607.1922 433.3843 1.401048 0.1722

R-squared 0.960787 Mean dependent var 1135.101

Adjusted R-squared 0.955185 S.D. dependent var 1419.770
S.E. of regression 300.5597 Akaike info criterion 14.38790
Sum squared resid 2529412. Schwarz criterion 14.61464
Log likelihood -232.4003 F-statistic 171.5108
Durbin-Watson stat 1.548943 Prob(F-statistic) 0.000000
 RESULT :

REGRESSION EQUATION:

( Fiscal Deficit)t= 607.1922 + 0.2801 (Inflation)t -0.7386 (tax) +

0.0297 (Government Expenditure) + -16.700 (Public Debt)

Dependent Sign of Value of T-values Comparing HypothesisTes

Variables Coefficient coefficients ( for with studied ting (Null
s testing H0 ) theory Hypothesis Ho)
relation
CPI + 0.2801 Positively NOT
(0.1419) (0.07095) * Related Rejected at 1%,
5%
Rejected at
10%
GE + 0.0297 (0.0000) Positively Rejected
(0.0000) *** related
PD - -16.700 (0.00805) Positively Rejected at all
(0.0161) *** related (In Level of
this case significance
negatively
related)
TR - -0.7386 (0.0012) Negatively Rejected
(0.0024)* *** Related At all levels

Note: In parenthesis is the P value of the coefficients.

 T- values for H0 testing have been written separately as alternative

hypothesis is single tailed.
 One star has been used for stating that hypothesises significant at 10%,
 2 star has been used for stating that hypothesises significant at 5%
 3 star has been used for stating that hypothesises significant at 1%
Interpreting the direction of the relationship between variables:
The intercept value is 607.1922 which means that if inflation, taxes,
government expenditure and public debt were all zero still there would
persist a fiscal deficit of 607.1922. While this case is unlikely to be possible.

 Here, we can see that since FD and CPI are positively related due to the
positive sign of coefficient CPI, it can be interpreted, that as CPI
increases by 1 unit average value of FD increases by 0.2801 keeping
government expenditure taxes, and public debt constant.
 Similarly is as government expenditure increases by 1 unit average
value of FD increases by 0.0297 units holding the other factors used in
study constant. This complies with the theory.
 While Public debt and Taxes are negatively related to FD as can been
seen by negative sign of their coefficient. As taxes increases by 1 unit,
average value of FD decreases by 0.7386 units and same is the case
with Public Debt.
 The relation of FD with The Taxes complies with the theory studied
while Public debt does not correlate with the studied theory. There
should be positive relation between FD and public debt. As Public debt
increases, interest payment increases too and so deficit should also
increase. But our model and analysis contradicts this theory. One of the
reasons can be existence of multi-collinearity that affects positive
negative relation.
 Durbin-Watson (DW) statistic---The DW statistics is 1.548943,which
means there is no presence of auto correlation in the error term.
 The R-squared value is 0.960787, which states that all the independent
variables can explain 96% variation in Fiscal Deficit. Hence it would
be rightful to state that these variables can be the major cause of higher
fiscal deficit. And we have almost added all significant factors.
 The regression further shows that more amount of absolute impact on
fiscal deficit is of Public Debt, then taxes, then inflation and lastly
government expenditure. Hence government expenditure is causing the
least amount of absolute change in fiscal deficit.
 Also over the years the taxes have played a significant role in
negatively impacting fiscal deficit as the co-efficient (0.7) is too high.
 The adjusted R2 is used to compare two or more regression models that
have the same dependent variable, but differing numbers of regressors.
The adjusted R square is 0.955 which is quite high and has increased as
compared to all the 2 variable linear regression run, hence it is better
explaining the variation in fiscal deficit than the 2 variable linear
regression regimes.
 The p-values as it tells the lowest significance level at which null
hypothesis can be rejected.
 The hypothesis testing has been explained in detail in the table and
hence we conclude that these values will always be significantly
different from zero as P value is small at 10% level of significance.
Hence our findings are statistically significant at 10% level of
significance.
Test of usefulness of the model :-
H50 : R square = 0 (All the variables does not explain a significant
portion of the fiscal deficit. (The model is useless)

H51: R square> 0 (All the variables collectively explain a significant

portion of the variation in Fiscal Deficit.)
The test statistics uses F value. As the p-value of this F- statistics is
already calculated and we have it as 0.000
The rule is to reject H50 : R square = 0 if p- value of F statistics is less
than level of significance.
Hence at even 1% level of significance we reject this hypothesis. Hence
as a result we can state that all the variables( taxes, government
expenditure, public debt and cpi collectively explain a substantiall
proportion of the variation in fiscal deficit. And the developed model is
quiet usefull
ANALYSING CERTAIN
TRENDS OF FISCAL
POLICY IMPACT ON
THE DIFFERENT
VARIABLES
FISCAL POLICY OF INDIA- A BRIEF ANALYSIS
Fiscal deficit as a proportion of GDP has emerged as a key indicator to
measure the fiscal health of a country. Fiscal Deficit is measured as the
difference between aggregate disbursements and revenue and non debt
capital receipts. Fiscal deficit summarizes in a way the total range of public
finances covering expenditure and revenue.
Therefore a limit on fiscal deficit has been put. Continued high fiscal
deficit are concern for several reasons.
This dis-empowers the government fiscal stance by pre-empting
larger The standard deviation is really large which shows the fiscal
deficits over the years have varied drastically from the expected mean
of the distribution. So data is quiet spread out. Hence the level of
skewness and peakedness of the data is also more share of public
resources for debt servicing there by leaving that much less for
desirable expenditure such as physical infrastructure (e.g. roads,
power) and social infrastructure (e.g. education and health). This
leads to declining ratio of capital expenditure to total expenditure
as seen over the period 1990-91 to 2002-03 in the case of India.

Continued fiscal deficit impact on interest and inflation rates

depending on how the deficits are financed. If the government
borrows in the domestic market, it puts pressure on the interest rate.

If the government finances the deficit by creating high power money,

it fuels inflation. In India’s case since deficits are financed by
open market borrowing, albeit through a preferential
Statutory Liquidity Ratio window, the risk is largely of
government borrowing leading to higher interest rate. Mere
limiting of its size alone may not yield the required result.
The impact of fiscal deficit depends upon the composition of
the fiscal deficit and the way it is being financed.
In India fiscal policy rule is not a new concept. For more than fifty years
since the inception of the constitution, government debt and borrowing
programmes for the central as well as the state governments in India were
managed without any explicit targets or rules except for the constitutional
provisions under articles 292 and 293. Apart from this the governments of
India time to time have taken different fiscal incentives to inculcate fiscal
discipline.
The improvement in States finances during the recent years owes a great
extent to the various fiscal reforms, viz.,
Implementation of FRLs
Introduction of VAT
Imposition of new taxes
Measures to improve tax administration
Measures aimed at limiting non-development expenditure, etc.
The larger devolution and transfer of resources from the Central
Government backed by strong macroeconomic growth also aided the fiscal
correction and consolidation process at the States Government level.

Adjustment in Central Government Finances, 2003-2009-10

(as per cent of GDP
Indicators 2003/ 2004/ 2005/ 2006/ 2007 2008/9(R 2009/10(B
4 5 6 7 /8 E) E)
1. Revenue
Receipts (a+b) 9.6 9.7 9.7 10.5 11.47 10.56 10.49
(a) Tax Revenue
(net of States Share) 6.8 7.1 7.5 8.5 9.3 8.76 8.10
(b) Non Tax revenue 2.8 2.6 2.2 2.0 2.2 1.8 2.4
2. Revenue 13.1 12.2 12.3 12.4 12.6 15.1 15.3
Expenditure
(a) Interest Payments 4.5 4 3.7 3.6 3.6 3.6 3.8
(b) Major Subsidies 1.61 1.46 1.32 1.38 1.50 2.43 1.90
3.Revenue Deficit (2- 3.6 2.5 2.6 1.9 1.1 4.53 4.83
1)
4Capital Expenditure 3.96 3.62 1.85 1.67 2.50 1.83 2.11
.
To5 Total Expenditure 17.1 15.8 14.11 14.13 15.1 16.93 17.43
. (2+4)

6 Fiscal Deficit 4.5 4 4.1 3.5 2.7 6.14 6.85

.
8 Primary Deficit -0.03 -0.05 -0.38 -0.19 -0.93 2.5 3.00
.
9 Outstanding 63.05 63.33 63.13 61.23 60.07 58.93 59.68
. Liabilities
Source- “Report of the Thirteenth Finance commission”,

The fiscal deficit of the centre declined from 4.48 percent of GDP in
2003-04 to 2.69 percent in 2007-08, the lowest since 1990-91. There was a
reversal of the declining trend in 2008-09, with the fiscal deficit ballooning
to 6.14 percent of GDP. For 2009-10, it has been budgeted at 6.85 percent
of GDP.
By looking into the data we can say that the improvement in fiscal deficit
indicators at central level is due to improvement in revenue receipts (tax
receipts) and mainly due to expenditure cut. It can be observed that at central
level among expenditure there is a heavy deterioration in the capital
expenditure, where as among revenue expenditure (like interest payments,
pension) there are not much changes. Fiscal Policy Rules should also take
capital expenditure as a major indicator of growth and priority should be
given for increasing this expenditure rather than cutting it off in the fiscal
consolidation process. Target variables should be chosen in such a way that
social sector and capital spending do not suffer in the course of adjustment.

States‟ Government Aggregate: Fiscal Adjustment 2003/04-2008/09

2008/9 2009/10
Indicators 2003/4 2004/5 2005/6 2006/7 2007/8 (BE) (RE)
I. Total Revenue 11.2 11.5 11.99 12.9 13.2 13.87 13.6
A. State own Revenue 7 7.25 7.24 7.73 7.70 7.70 7.60
i). State Own Tax 5.6 5.8 5.9 6.1 6.07 6.21 6.27
ii). State Own Non Tax 1.4 1.47 1.3 1.62 1.63 1.50 1.33
B. Transfers from
Centre 4.1 4.2 4.7 5.2 5.5 6.16 6

i). Tax Share 2.4 2.5 2.65 2.9 3.2 3.26 3.17

2. Grant in Aid 1.7 1.7 2.1 2.27 2.29 2.9 2.83

II. Revenue Expenditure 13.5 12.7 12.2 12.2 12.3 13.6 14.09
III. Capital Expenditure 1.88 2.14 2.32 2.47 2.8 2.6
IV. Revenue Deficit 2.3 1.2 0.19 -0.77 -0.94 -0.27 0.5
V. Gross Fiscal Deficit 4.4 3.4 2.56 1.69 1.51 2.64 3.23
VI. Primary Deficit 1.5 0.65 0.2 -0.6 -0.61 0.68 1.28
VII. State Government
Outstanding Liabilities 33.2 32.7 32.6 30.2 27.8 27.27 Na
VIII. State Government
Outstanding Guaranties 7.5 8 6.5 5.5 3.7 Na

It can be seen from the above data that the State Governments may pursue
their efforts for improving revenue collection from non-tax resources,
ensuring the quantity and quality of major expenditure heads, reducing
recourse to borrowed funds for financing expenditure and enhancing
devolution of resources to the local Government level.
Contingent liabilities should be capped, but in addition off budget borrowing,
where debt serving will fall to government, should be consolidated with on
budget borrowing.

HENCE BY COMPARING BOTH THE DATA WE HAVE GOT

The improvement at central level is due to slight improvement in revenue
receipts (tax receipts) and mainly due to expenditure cut. It can be observed
that among expenditure there is a heavy deterioration in the capital
expenditure, where as among revenue expenditure (like interest payments,
pension) there is not much changes.
Fiscal Policy Rules should also take care of capital expenditure as it is a
major indicator of growth and priority should be given for increasing this
expenditure rather than cutting it off in the fiscal consolidation process.
Target variables should be chosen in such a way that social sector and
capital spending do not suffer in the course of adjustment
CONCLUSION
REGRESSION EQUATION:

( Fiscal Deficit)t= 607.1922 + 0.2801 (Inflation)t -0.7386 (tax) +

0.0297 (Government Expenditure) + -16.700 (Public Debt)

Hence we reject the following all hypothesis at 10% level of significance.

H10 : β1 = 0 (There is a no impact inflation or cpi on Fiscal deficit)

H20 : β2 = 0. (There is a no impact inflation or cpi on Fiscal deficit)
H30 : β3 = 0 (There is a no impact inflation or cpi on Fiscal deficit)
H40 : β4 = 0 (There is a no impact inflation or cpi on Fiscal deficit)
H50 : R square = 0 (All the variables does not explain a significant
portion of the fiscal deficit. The model is useless)

So we can conclude that - WE EXCEPT

H11: β1> 0 (Inflation increases fiscal deficit i.e there is a positive impact
of inflation on Fiscal deficit.)

H21: β2< 0 (TAXES reduces fiscal deficit i.e there is a negative impact of
taxes on Fiscal deficit deficit)

H31: β3> 0 (There is a negative impact of taxes on Fiscal deficit deficit.)

H41: β4> 0 (Public debt increases fiscal deficit i.e there is a positive
impact of taxes on Fiscal deficit.)

H51: R square > 0 (All the variables collectively explain a significant

portion of the variation in Fiscal Deficit.)
This study was conducted in Indian perspective, especially on the fiscal
deficit and economic growth. Data on the fiscal deficit and economic growth
from the year 1980 to 2010 were collected for the study purpose.
The purpose of this paper was to show that there is a two-way relationship
between inflation and government budget deficit.
The link between Budget deficit, and Inflation is a universal phenomenon
and it is peculiar to every government in the world. In other words, while
government budget deficit may cause higher inflation, government
expenditure and revenue and therefore government budget deficit is itself
affected by the inflationary process. Therefore, inflation and budget deficit
are both considered as endogenous variables. It is shown that although in
general there may be some ambiguity with respect to the effect of budget
deficit on inflation and vice versa, but as far as the features of public sector
economics in most developing countries are concerned, we have presented
that higher budget deficit causes monetary base to increase and this, by
increasing money supply raises the rate of inflation. Similarly, as a result of
higher inflation, budget deficit increases therefore the process of self-
generating inflation continues as long as budget deficit is not being
eliminated.
The empirical part of this paper, by concentrating on the case of the supports
the above hypothesis. It has been witnessed that over the years particularly
in the last decade not only burden of fiscal deficit has increased but also
mounting inflation rate. Government expenditure has also increased the
pressure of the burden on Central government.
Result obtained from empirical analysis shows that the important variables
which are affecting fiscal deficit is increasing inflation and taxes while
government expenditure does not count. Our analysis of relationship between
public debt and fiscal deficit has come quite opposite to that of the underlying
economic theory.
The fiscal policies which have actually led to the improvement in fiscal
deficit indicators at central level is due to improvement in revenue receipts
(tax receipts) and mainly due to expenditure cut.

Therefore, to analyses this issue in depth one can combat with the
strategy of the wrong sign we can convert the model to a log-log model
or use lag values of the used variables to combat with the problem of
multi-co linearity. One can further go for empirical analysis in this
direction for India and extended the present study by analyzing the
impact of different types of government expenditure and Consumer Price
Index (CPI) on fiscal deficit which may give more insights about the
problem.
CERTAIN FINDINGS BEFORE WE MAKE
OUR RECOMMENDATION
Recently the budget 2015 was announced.
The budget of the country is one of the key determinants of previous years,
and upcoming years fiscal deficit, inflation and the corresponding fiscal and
monetary policy undertaken to combat it. Hence we make an attempt to
analyse the fiscal policy undertaken to combat the current fiscal deficit along
with the growing inflation.

Eyeing the highlights of Economic Survey 2015

An attempt has been made to make a summarised version of the the
performance of our country in the previous years in the segments of inflation,
fiscal deficits, the fiscal health, infrastructure etc.

INFLATION, GROWTH

 Evidence shows India recovering, but not yet surging

 Inflation not seen up significantly from current level (likely to remain
in 5.0-5.5% range)
 Monetary framework to show commitment to low inflation
 Jan Dhan plan, Aadhaar to help target subsidies
 FY15 price subsidy pegged at 4.24% of GDP
 GDP growth points to industrial recovery
 GST, direct benefit transfer to be game changers
 Recommend retail FDI reform to better farm supply chain
 India must adhere to medium term fiscal gap target of 3%
 GST, direct benefit transfers to be game changers
 Labour, capital, land market distortions limit economic growth
 FY15 GDP growth largely driven by domestic demand
 Fall in crude prices has compressed import bill
 Growth to get boost from likely monetary policy easing
 Private investment must be engine of long-term growth
 Subsidy doesn't seem best weapon to fight poverty

FISCAL GAP:-
Because of the widening fiscal gap over the years
it’s required that
 May have to cut some spending FY15 to meet aim
 Need to cut expenditure if revenue not picking up
 Falling inflation likely to persist going forward
 Budget aim of gross tax revenue growth over estimated

FISCAL HEALTH
 Government remains committed to fiscal consolidation(quality key to
make it sustainable)
 Need medium to long-term fiscal policy framework
 Government borrowings should fund invest, not for current spend
 Urge government to aim to bring down fiscal gap to 3.0% of GDP
 Higher tax share to states won't impact fiscal discipline
 Must start expenditure control process to cut fiscal gap
 Divest mop-up so far Rs 240 billion this FY
 Coal price reform must factor in impact on power price
 Banking hobbled by policy that impedes competition
 Potential for further gains from coal pricing reforms
 Public invest in railways to be key to growth revival
 High rail freight rates hinder industry competitiveness
 Private investment must remain primary engine of longrun growth
 FINANCIAL SECTOR, MARKETS
 Capital, labour, land market distortions hurting manufacturing
 SLR need, priority lending creating fincl repression
 Trade performance signals good time to scrap gold curbs
 Must create extra fiscal space to ensure economic stability
 Undertaken major reform steps for banks, insurance
 See some stress on asset quality of commercial banks
 Rising non-oil, non-gold imports source of concern
 Liquidity conditions remained broadly balanced
 Low inflation makes space for easing monetary condition
 Ensure borrow over the cycle only for capital formation
 Steps taken by RBI played key role in liquidity management
 Need to conclude monetary policy framework agreement

SUBSIDY
 Rationalised subsidies to free resources to some extent
 Subsidy on power can only benefit relatively rich
 Current study shows rich benefiting more from subsidy
 Subsidy reform to rationalise expenditure
 Subsidies via direct benefit transfers laudable goal
 Rationalisation of food subsidies needs more effort

INVESTMENT
 India ranks among most attractive invest destinations
 Invest activity seems grounded on stronger footing
 Investment stuck in stalled projects at about 7% of GDP
 Public invest can revive growth engine in short run
 PSUs, especially railways, must lead public investment
 Expenditure switch from consumption to invest
 FY15 ESTIMATES WERE
 weak import largely on sharp fall in crude prices
 saw hardly any external support to growth
 growth largely domestic demand driven
 fiscal deficit of 4.1% of GDP will be met
 April-December major subsidies up 12.5% on year
 Equity markets continued to do well
 price subsidy pegged at 4.24% of GDP

FY16 OUTLOOK (predictions)

 8.5% GDP growth possibility

 FY16 econ growth seen 8.1-8.5%
 Liquidity conditions seen comfortable in FY16
 Economy to over perform on inflation, make way for rate cut
 Inflation to be 0.5-1.0% lower than RBI's target
 FY16 CPI inflation to be in 5.0-5.5% range
A Comparative study between Budget 2014-15
and 2015-16

Budget 2014-15 Budget 2015-16

It was presented on July 10, 2014 It was presented on February 28,
by Finance Minister Arun Jaitely 2015 by Arun Jaitely

Income tax exemption limit was This year total exemption of up to

raised last year by 50,000 to Rs Rs 4,44,200 can be achieved as
2.5 lakh and for senior citizens to stated by the Finance Minister.
Rs 3 lakh

Exemption limit for investment in Additional 2% surcharge for the

financial instruments under 80C super rich with income of more than
raised to Rs 1.5 lakh from Rs 1 1 crore.
lakh.

Investment limit in PPF raised to Service Tax increased to 14% from

Rs 1.5 lakh from Rs 1 lakh. the current 12.36%. Wealth Tax has
been abolished. 100% exemption
for contribution to Swachch Bharat
apart from CSR.

Deduction limit on interest on Rs 2,46,726 crore allocated for

loan for self-occupied house was Defence, the primary focus of this
raised to Rs 2 lakh from Rs 1.5 budget is on "Make in India" for
lakh. quick manufacturing of Defence
equipment.
Committee to look into all fresh
tax demands for indirect transfer
of assets in wake of retrospective
tax amendments of 2012.
Fiscal deficit target was retained
at 4.1% of GDP for current fiscal
and 3.6% in FY 16.
Rs 150 crore was allocated for
increasing safety of women in
large cities.
Government last year projected
revenue generation from taxes of
Rs 9.77 lakh crore.
KisanVikaspatra was promised to It has also been projected by the
be reintroduced, national savings Finance Minister that the
certificate with insurance cover to government will ensure Housing for
be launched
FDI limit to be hiked at 49 pc in
defence, insurance.
Disinvestment target fixed at Rs
58,425 crore
AGRICULTURE
Rs 25, 000 crore for Rural
Infrastructure Development Bank.
To support Micro Irrigation
Programme Rs 5,300 crore are
separately assigned.
INFRASTRUCTURE :
Rs 70, 000 crores to the
Infrastructure sector. Tax free bonds
for projects in rail road and
irrigation.
Purchasing Power Parity (PPP)
model for infrastructure
development to be revitalised and
govt will bear majority of the risk.
Rs 150 crore allocated this time for
research and development. NITI to
be established and involvement of
entrepreneurs, researchers to foster
scientific innovations.
WELFARE SCHEMES :
50, 000 toilets will be constructed
under the Swacch Bharat Abhiyan.
Two new programs will be
introduced - GST and JAM Trinity.
GST will be implemented by April
2016
all by the year 2020.
Up gradation of 80, 000 secondary
and senior secondary schools.
DBT will be further be expanded
from 1 crore to

Gross borrowings were pegged at
Rs 6 lakh crore in 2013-14.
Contours of GST was finalised
last fiscal; govt assured to look
into DTC proposal.
Digital India program was
promised to be launched last year
to ensure broadband connectivity
at village level.
National Rural Internet and
Technology Mission for services
in villages and schools, training in
IT skills proposed.
Rs 100 crore scheme to support
600 new and existing community
radio stations.
Govt's plan expenditure pegged at Three Key achievements :
Rs 5.75 lakh crore and non plan
at Rs 12.19 lakh crore
10.3 crore.
In the Atal Bihari Pension Yojana,
Government will contribute 50% of
the premium limited to Rs 1000 a
year
A new scheme for physical aids and
assisted living devices for people
aged over 80.
RENEWABLE ENERGY
Rs 75 crore for electric cars
production. Renewable energy
target for 2022 : 100K MW in solar;
60K MW in wind; 10K MW in
biomass and 5K MW in small
hydro.
TOURISM
Development schemes for churches
and convents in old goa; Hampi,
Elephanta caves, Forests of
Rajasthan, Leh Palace, Varanasi,
JallianwalaBagh, QutbShahi tombs
at Hyderabad to be under the new
tourism scheme
There will also be VISA on arrival
for 150 countries.
1. Financial inclusion- 12.5 crores
families financially mainstreamed in
100 days.
2. Transparent Coal block auctions
to augment resources of the States.
 3. Swacch Bharat is not only a
program to improve hygiene but has
also become a movement to
regenerate India

Govt's plan expenditure pegged at Three Key achievements :

Rs 5.75 lakh crore and non plan 1. Financial inclusion- 12.5 crores
at Rs 12.19 lakh crore families financially mainstreamed in
100 days.
2. Transparent Coal block auctions
to augment resources of the States.
3. Swacch Bharat is not only a
program to improve hygiene but has
also become a movement to
regenerate India
Set aside Rs 11,200 crore for PSU It was also described in the budget
banks capitalization, government report 2015-16 that the credibility of
in favour of consolidation of PSU the Indian economy has been re-
banks ; the objective is to make established in the last nine
banks more accountable and months.The last nine months have
transparent seen a turn around, making India
one of the fastest growing
economies in the World with a real
GDP growth expected to be around
7.4%
Govt's plan expenditure pegged at Three Key achievements :
Rs 5.75 lakh crore and non plan 1. Financial inclusion- 12.5 crores
at Rs 12.19 lakh crore families financially mainstreamed in
100 days.
2. Transparent Coal block auctions
to augment resources of the States.
3. Swacch Bharat is not only a
program to improve hygiene but has
also become a movement to
regenerate India.
Set aside Rs 11,200 crore for PSU
banks capitalization, government
in favour of consolidation of PSU
banks ; the objective is to make
banks more accountable and
transparent
Rs 7,060 crore were separately
allocated for setting up 100 smart
cities
Inflation has declined a structural
shift has been observed, CPI
Inflation projected at 5% by the end
of the year, consequently, easing of
monetary policy.
GDP growth in 2015-16 is projected
to be between 8 to 8.5%.

Critical evaluation for the budget 2015

Mr Arun Jaitley recently presented the Union Budget for the financial year
2015-2016.Though there was disappointment among the middle class men,
we feel the Budget is more practical vis-à-vis the previous ones.
Though Arun Jaitley says he intends to achieve the fiscal deficit goal this
year, he has prolonged the period by two years to reach the targetted figure of
fiscal deficit of 3% of the GDP. This sends a wrong message in terms of the
government‟s commitment towards fiscal prudence. Also, the revenue deficit
stays at 2.8% of GDP, which is much higher than it should be.

By reducing the corporate profit tax to 25% would definitely lead to

more foreign inflows, as also to do away with exemptions is
appreciable. This would uncluttered the system, especially as a certain
amount of manipulation was needed including hand greasing to avail
exemptions .and also provide a good competitive environment for the
industries leading to better productivity and output.

By charging 2% on the super rich with income above 1 crore would

fetch in more revenues for the Government.100% exemption for
Swachh Bharat and Clean Ganga schemes apart from Corporate Social
Responsibility would make the industries more sensitive towards the
society and environment
Though the service taxes have increased from 12.36% to 14%, but it is
to compensate for the coming GST(goods and services tax) bill. GST
would be benefiting both for the Government and the public as only
one tax would be levied covering VAT, service taxes, educational and
higher educational cess, etc instead of several taxes being charged. This
would lead to uniformity and also reduced lay in inter-state goods
transportation.
Providing tax free bonds for railway projects would definitely lead to
increasing investments in the public sector which would be beneficial
for the overall economy, especially at a time when private sector is not
in a mood of loosening its purse strings.
By providing subsidies etc via direct cash transfers would help in
checking black marketing. But the government should make sure that
the subsidies actually reach the pure by bringing in more reforms like a
rule in Mexico where only those families are provided with subsidies
who send their children to schools, etc.
For the Atal Pension Yojana, the government will contribute 50% of
the premium limited to Rs. 1000 a year, New scheme for physical aids
and assisted living devices for people aged over 80,Government to use
Rs. 9,000 crore unclaimed funds in PPF/EPF for Senior Citizens
Fund. So a good news for the old aged people.
But the alloactaion for renewable energy does not seem to be adequate
since solar and wind energy are available in India in abundance
Make in India Policy for defence equipments was definitely the need of
the hour in order to make India a sovereign country in reality and stay
less dependent on countries like Isreal and Russia.
Doing away with different types of foreign investment — like FPI and
FDI — and replace them with a comprehensive type is a good step.
For the common man, a good alternative that the FM has proposed is
the Gold Monetization Scheme and option of buying sovereign gold
bonds with fixed interest rate. The move is also hugely well received
for the fact that India remains a gold obsessed country and these
schemes will remove our need to hold the metal physically while also
encashing on gold which is unproductively lying in lockers.
And though the proposed Bankruptcy Law seems like a small measure,
it will help clean up the system to a very large extent and also put new
people in charge of old but defunct businesses. The move to micro
finance thousands of businesses, to my mind, can be a real cracker as
thousands and lakhs will find employment without big degrees, and this
can be a game-changer.
The other measures to improve ease of doing business like removing
tax uncertainty, introduction of digital invoices and electronic records,
as well as modernising capital markets will go a long way. This is more
so when India has been found to rank a low 142nd position in ease of
doing business in the world index, and when prominent business faces
like Deepak Parekh have recently lamented that things on the ground
haven‟t changed since the new government took office.
There have been a series of feel good proclamations on Black Money
and how evaders will be slapped with Rigorous Imprisonment. But
there is no clarity on how the black sheep will be identified and
booked. Or, how precisely will the direct subsidy policy or Jan dhan
Yojana become effective.
WHAT EXPERTS HAVE TO SAY?
To examine the current monetary policy framework of the Reserve Bank of
India (RBI) an expert committee has been appointed and has suggested that
the apex bank should adopt the new CPI (consumer price index) as the
measure of the nominal anchor for policy communication.
The expert committee was headed by Urjit R. Patel, Deputy Governor of the
Reserve Bank of India.
The main recommendations of committee are as follows:-

 The the target for inflation or nominal anchor should be set at 4 per
cent with a band of +/- 2 per cent around it.
 Shifting the monetary policy regime of the current approach to one that
is centred around the nominal anchor new CPI only.
 From the current level of 10 per cent Inflation to be brought down to 8
per cent not exceeding over a period to the next 12 months and to 6 per
cent over a period not exceeding the next 24 month period before
formally adopting the recommended target of 4 per cent inflation with a
band of +/- 2 per cent.
 Ensuring that the fiscal deficit as a ratio to Gross Domestic Product is
brought down to 3.0 per cent by 2016-17, the committee asked the
same from the Central Government. The government has set a fiscal
deficit target of 4.8% for the current fiscal year.

IMPLICATION :
This may be because it could mean higher interest rates for longer—not
the kind of thing a government seeking to spur growth in a slowing
economy wants to head.
“The key implication of this new CPI-based inflation targeting
framework is that interest rates in India will remain higher for longer”

NOW WHAT WE HAVE TO SAY?

RECOMMENDATION

Source:- DIFFERENT NEWSPAPER EDITIONS OF ECONOMIC TIMES

After having seen the past performance of India it was required that the
country required
1. Enhanced revenue generation to be government priority
2. Hyper-growth in tech start-ups, service sector
3. To balance higher public invest with fiscal discipline
4. Rural penetration of IT services to drive 'Make in India'
After the release of the budget and our analysis of the The hike in excise duty
on diesel and petrol, reduced subsidies and expenditure compression will help
the government to stick to the challenging fiscal deficit target of 3.9 per cent
of GDP despite weakness in revenue collection and delayed divestment.
Jaitley maintains his commitment to bring the deficit down to 3% of GDP,
but in three rather than two years.The Union Budget has introduced several
measures to stimulate investments but it fails in terms of fiscal consolidation.
Of course there are few things have done in terms of tax measures, including
service tax increase and 2% surcharge on the super rich, this would garner
some money. But while the Commission has advocated more tax to states at
42% instead of earlier 32%, the flow of resources from the Centre to the state
through other channels has been cut.
Unless there is a dramatic fall in inflation, it‟s hard to believe that India‟s
policy rate will go down below. Higher fiscal deficit will lead to higher
government borrowing. That will put pressure on interest rates and private
firms will be denied money when they need it.
A thumbs up should be given to the Modi Government's recent move to
introduce a flexible inflation-targeting framework. It will help deliver low
and stable inflation, and diminish the prospect of renewed bouts of high
inflation.
Also Discussions on the creation of a debt management agency independent
of RBI have been on for years because of the obvious conflict of interest that
the central bank has by being a debt manager and a money manager. As the
government‟s investment banker, RBI‟s objective is to keep the borrowing
cost of the government low and to achieve this it can use a string of
instruments including open market operations while as a monetary authority
its objective is price stability, typically achieved through change in interest
rates. Despite the conflict of interests, RBI has been entrusted with this job
because of India‟s high fiscal deficit and consequently large market
borrowings. The draft code of the Financial Sector Legislative Reforms
Commission (FSLRC) has proposed the creation of an independent public
debt management agency—it would have an independent goal and objective
but would operate as an agent of the central government. To make it a
success, it should be a statutory corporation, keeping an arm‟s length both
from the government as well as RBI.
BIBLIOGRAPHY
Throughout the paper we have used software package Eviews and Microsoft
Excel to run regression models.

Data collection

 Secondary data which are collected from the Handook of statistics

reports of RBI have been utilized in this study.
 Further, textbooks, journals, magazines in the economic perspective
were utilized for this study.
Following are the online links that have been referred :

 http://zeenews.india.com/business/budget-2015/economic-survey-
2015-overview-and-highlights_119732.html
 http://www.livemint.com/Opinion/kHm7c3DoPy3UooEA6mpSQJ/RBI-will-not-be-in-a-
hurry-to-cut-rates.html?utm_source=copy
 https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web
&cd=3&cad=rja&uact=8&ved=0CCcQFjAC&url=http%3A%2F%2
Fwww.academia.edu%2F1381060%2FFiscal_Deficit_and_Inflation
_An_empirical_analysis_for_India&ei=XsAZVd2PCIK2uASd3oLQ
Dg&usg=AFQjCNFJSJ9wUDcm8W9_UZzAmQmPdqabcA&sig2=
ylM0NA5uv69fa8UN7hSv2g&bvm=bv.89381419,d.c2E
 https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web
&cd=12&cad=rja&uact=8&ved=0CCUQFjABOAo&url=https%3A
%2F%2Fideas.repec.org%2Fa%2Frej%2Fjournl%2Fv14y2011i42p1
31-
158.html&ei=e8AZVd7XIMOjugSbmoCoBQ&usg=AFQjCNESVn
S--ngxRDq0TsCw-27NJ2hAiQ&sig2=6ozwWozyRJVD-
fvRVSgeuw&bvm=bv.89381419,d.c2E
 https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web
&cd=13&cad=rja&uact=8&ved=0CC0QFjACOAo&url=http%3A%
2F%2Fwww.imf.org%2Fexternal%2Fpubs%2Fft%2Fwp%2F2003%
2Fwp0365.pdf&ei=e8AZVd7XIMOjugSbmoCoBQ&usg=AFQjCN
FkJsM369orfcG02l72fHUYNAs7rw&sig2=s8cZx7Jfo-
opRHkNU7tOGw&bvm=bv.89381419,d.c2E
APPENDIX:
TABLE 1

YEAR Fiscal D. Taxes

1975-76 13.64 60.1
1976-77 15.72 65.81
1977-78 18.13 70.6
1978-79 21.26 85.68
1979-80 31.33 85.67
1980-81 51.1 93.58
1981-82 45.91 115.42
1982-83 59.73 130.17
1983-84 77.7 154.41
1984-85 109.72 176.51
1985-86 135.44 211.4
1986-87 170.36 243.19
1987-88 184.31 280.15
1988-89 207.7 337.51
1989-90 237.22 383.49
1990-91 306.92 429.78
1991-92 246.22 500.69
1992-93 302.32 540.44
1993-94 459.94 534.49
1994-95 403.13 674.54
1995-96 424.32 819.39
1996-97 463.94 937.01
1997-98 630.62 956.72
1998-99 799.44 1046.52
1999-00 899.1 1282.71
2000-01 1078.54 1366.58
2001-02 1230.74 1335.32
2002-03 1338.29 1585.44
2003-04 1155.58 1869.82
2004-05 1262.52 2247.98
2005-06 1457.43 2702.64
2006-07 1512.45 3511.82
2007-08 1207.14 4395.47
2008-09 3290.24 4433.19
2009-10 4114.48 4565.36
2010-11 3610.26 5698.68
2011-12 5141.03 6297.65
2012-13 4844.5 7418.77
2013-14 5160.42 8360.26
Source:rbi.org.in

TABLE 2
YEAR Fiscal D. Govtexp
1975-76 13.64 683.14
1976-77 15.72 710.24
1977-78 18.13 817.88
1978-79 21.26 889.5
1979-80 31.33 965.9
1980-81 51.1 1180.68
1981-82 45.91 1356.76
1982-83 59.73 1497.73
1983-84 77.7 1753.57
1984-85 109.72 1940.37
1985-86 135.44 2141.54
1986-87 170.36 2402.09
1987-88 184.31 2666.49
1988-89 207.7 3104.97
1989-90 237.22 3468.07
1990-91 306.92 3985.29
1991-92 246.22 4577.35
1992-93 302.32 5161.18
1993-94 459.94 5913.08
1994-95 403.13 6871.54
1995-96 424.32 7920.15
1996-97 463.94 9286.29
1997-98 630.62 10185.59
1998-99 799.44 11663
1999-00 899.1 13125.37
2000-01 1078.54 14066.61
2001-02 1230.74 15316.72
2002-03 1338.29 16202.93
2003-04 1155.58 17713.05
2004-05 1262.52 19175.08
2005-06 1457.43 21527.02
2006-07 1512.45 24766.67
2007-08 1207.14 28407.27
2008-09 3290.24 32492.84
2009-10 4114.48 37075.66
2010-11 3610.26 43603.23
2011-12 5141.03 51418.97
2012-13 4844.5 57720.6
2013-14 5160.42 64850.37
Source:rbi.org.in

TABLE 3
Year Fd G.E Tax Revenue P.D CPI
1980-81 51.1 1180.68 93.58 47.94 395
1981-82 45.91 1356.76 115.42 48.92 444
1982-83 59.73 1497.73 130.17 53.29 467
1983-84 77.7 1753.57 154.41 52.55 520
1984-85 109.72 1940.37 176.51 55.95 521
1985-86 135.44 2141.54 211.4 60.51 546
1986-87 170.36 2402.09 243.19 64.85 572
1987-88 184.31 2666.49 280.15 68.15 629
1988-89 207.7 3104.97 337.51 67.7 708
1989-90 237.22 3468.07 383.49 70.06 746
1990-91 306.92 3985.29 429.78 68.85 803
1991-92 246.22 4577.35 500.69 72.89 958
1992-93 302.32 5161.18 540.44 72.01 1076
1993-94 459.94 5913.08 534.49 72.39 1114
1994-95 403.13 6871.54 674.54 70.04 1247
1995-96 424.32 7920.15 819.39 67.28 1381
1996-97 463.94 9286.29 937.01 64.37 256
1997-98 630.62 10185.59 956.72 66.29 264
1998-99 799.44 11663 1046.52 67.11 293
1999-00 899.1 13125.37 1282.71 70.47 306
2000-01 1078.54 14066.61 1366.58 73.67 305
2001-02 1230.74 15316.72 1335.32 78.79 309
2002-03 1338.29 16202.93 1585.44 82.86 319
2003-04 1155.58 17713.05 1869.82 83.23 331
2004-05 1262.52 19175.08 2247.98 82.13 340
2005-06 1457.43 21527.02 2702.64 79.07 353
2006-07 1512.45 24766.67 3511.82 74.66 380
2007-08 1207.14 28407.27 4395.47 71.44 409
2008-09 3290.24 32492.84 4433.19 72.21 450
2009-10 4114.48 37075.66 4565.36 70.63 513
2010-11 3610.26 43603.23 5698.68 65.53 564
2011-12 5141.03 51418.97 6297.65 65.52 611
2012-13 4844.5 57720.6 7418.77 66.03 672

Source: www.rbi.org, World Bank

 REGRESSION

 REGRESSION R1

Linear Regression
Dependent Variable: Fiscal Deficit
Method: Least Squares

Sample(adjusted): 1975 2013

Included observations: 39 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

C -134.8355 70.02981 -1.925401 0.0619

Government 0.087454 0.003212 27.22402 0.0000
Expenditures

R-squared 0.952451 Mean dependent var 1095.355

Adjusted R-squared 0.951166 S.D. dependent var 1511.907
S.E. of regression 334.1073 Akaike info criterion 14.51072
Sum squared resid 4130224. Schwarz criterion 14.59603
Log likelihood -280.9591 F-statistic 741.1472
Durbin-Watson stat 1.564470 Prob(F-statistic) 0.000000

Source :Eviews

REGRESSION R2
NOTE: PD- public debt and FD- fiscal deficit

Dependent Variable: FD
Method: Least Squares
Date: 03/15/15 Time: 08:14
Sample(adjusted): 1981 2012
Included observations: 30 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

C 9.130019 2.137554 4.271247 0.0004

PD -0.073234 0.040118 -1.825466 0.0829

R-squared 0.142820 Mean dependent var 5.248636

Adjusted R-squared 0.099961 S.D. dependent var 1.085762
S.E. of regression 1.030066 Akaike info criterion 2.983632
Sum squared resid 21.22074 Schwarz criterion 3.082817
Log likelihood -30.81995 F-statistic 3.332324
Durbin-Watson stat 1.396195 Prob(F-statistic) 0.082902

SOURCE: EVIEWS

REGRESSION R3
Linear Regression:
Dependent Variable: Fiscal Deficit
Method: Least Squares

Sample(adjusted): 1975 2013

Included observations: 39 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

C -15.18406 84.50565 -0.179681 0.8584

TAXES 0.656178 0.030547 21.48108 0.0000

R-squared 0.925768 Mean dependent var 1095.355

Adjusted R-squared 0.923762 S.D. dependent var 1511.907
S.E. of regression 417.4571 Akaike info criterion 14.95616
Sum squared resid 6448006. Schwarz criterion 15.04147
Log likelihood -289.6451 F-statistic 461.4366
Durbin-Watson stat 1.570070 Prob(F-statistic) 0.000000
SOURCE: EVIEWS

REGRESSION R4
 Dependent Variable: FD
Method: Least Squares

Sample(adjusted): 1975- 2013

Included observations: 39 after adjusting endpoints

Variable Coefficie Std. Error t-Statistic Prob.

nt

CPI 0.080328 0.872121 0.092107 0.9271

C 1051.747 533.2325 1.972399 0.0561

R-squared 0.000229 Mean dependent var 1095.355

(shown in graph above)
Adjusted R-squared - S.D. dependent var 1511.907
0.026792 (shown in graph above)
S.E. of regression 1532.026 Akaike info criterion 17.55649
Sum squared resid 8684285 Schwarz criterion 17.64180
2
Log likelihood - F-statistic 0.008484
340.3516
Durbin-Watson stat 0.093813 Prob(F-statistic) 0.927110

Source: Eviews

REGRESSION R5
Dependent Variable: CPI
Method: Least Squares

Sample(adjusted): 1975 -2013

Included observations: 39 after adjusting endpoints
Variable Coefficie Std. Error t-Statistic Prob.
nt
FD 0.002854 0.030983 0.092107 0.9271
C 539.7459 57.35648 9.410375 0.0000
R-squared 0.000229 Mean dependent var 542.8718
Adjusted R-squared - S.D. dependent var 284.9691
0.026792
S.E. of regression 288.7612 Akaike info criterion 14.21900
Sum squared resid 3085173. Schwarz criterion 14.30431
Log likelihood - F-statistic 0.008484
275.2705
Durbin-Watson stat 0.450843 Prob(F-statistic) 0.927110

SOURCE:-EVIEWS

REGRESSION R6
Dependent Variable: FD
Method: Least Squares

Sample: 1980 2012

Included observations: 33

Variable Coefficient Std. Error t-Statistic Prob.

CPI 0.280124 0.185327 1.511507 0.1419

GE 0.191776 0.029766 6.442810 0.0000
PD -16.70020 6.522082 -2.560562 0.0161
TR -0.738632 0.221396 -3.336243 0.0024
C 607.1922 433.3843 1.401048 0.1722

R-squared 0.960787 Mean dependent var 1135.101

Adjusted R-squared 0.955185 S.D. dependent var 1419.770
S.E. of regression 300.5597 Akaike info criterion 14.38790
Sum squared resid 2529412. Schwarz criterion 14.61464
Log likelihood -232.4003 F-statistic 171.5108
Durbin-Watson stat 1.548943 Prob(F-statistic) 0.000000

SOURCE: EVIEWS