STOKING SENTIMENT, A

LITTLE REFORM WOULD GO A

LONG WAY
Presented by:
Adarsh Jha
Asitava Bose
Gaurav Batra
Karan Rajput
Manak Gaushal
Manpreet Singh
Define revenue deficit and fiscal deficit. It is
often said that the size of the revenue deficit is
more worrisome than the fiscal deficit. Do you
agree? Why or why not.
 The budget deficit represents the gap between the revenue and
capital accounts and the total expenditure on both these accounts.

 Revenue Deficit is defined as the gap between current

expenditures and receipts on revenue account.
Revenue Deficit = Revenue Expenditure - Revenue receipts

 Fiscal deficit tells us the extent to which the exchequer is living

beyond its means.

Fiscal deficit = revenue receipts + non-financial liability or non-

debt imposing capital receipts (grants, proceeds of sales of
assets, divestment proceeds) – total expenditure.
 Causes of the fiscal deficit
 Revenue

 Expenditure
Fiscal Consolidation is absolutely
necessary for containing inflation,
reducing interest rates, promoting
investment and growth, and fostering
reasonable stability in financial system
and the foreign exchange market.
Size of the revenue deficit is more
worrisome than the fiscal deficit

 Quality of government expenditure and the

nature of tax system is more important
 On account of more and more capital
expenditure
 On account of low priority revenue expenditure
 Implications of high deficits

The high fiscal deficits do not seem to have

crowded out private investment as the
demand for funds from this sector has been
quite low and the banking system is awash
with liquidity. But the presence of a high
revenue deficit has rather crowded out
productive government expenditure.
 “Though raising tariffs will fetch the
government some much needed revenue, it
would be the wrong thing to do”

A tariff is a tax on import and is also

referred to as customs duty. Tariffs are a
popular and visible measure used to
discourage trade. A tariff can be based on
weight, volume, or number of units or it
can be ‘ad valorem’ which figures as a
percentage of price.
Reasons for a protectionist attitude

• Infant industry
• National Security
• Employment
 Indian Story
 Inward looking strategy

 1991 reforms

 Founder member of WTO

 Reducing peak rate of customs duty to 25%

Supply side Fiscal Policy
 What they need to do?

 Expansion of the tax base

 Importance of User Charges
 Privatization
 The central challenge facing the government is how
to contain the net borrowing requirements of the
central government

• borrowing from RBI, which is tantamount to printing money.

• borrowing from non-RBI domestic sources such as banks, other

financial institutions and individuals; and

• borrowing from foreign sources such as donor governments and

multilateral institutions
 The problems arising

 Now there is more money in

the market, a person spends
more, demand rises but is not
supported with the supply side
of it. This leads to INFLATION.

 This is called as the Demand

Pull Inflation.
 When the government borrows from
public and non- RBI sources.
 Reduces the loans available for private investments.

 As it competes for the loans for households, business firms, and

states or local governments.

 This process reduces the opportunity for other players to invest in

fields of technology and projects which could have lead to growth.

 Demand for the loans rises and the rate of interest will increase.
Crowding out effect is the reduction
in private investment purchases
caused by the higher interest rates
that result from government
borrowing
 Fiscal Responsibility and Budget Management
Bill, 2000 - Introduced in Lok Sabha in
December 2000.
 The Bill envisages that within a period of ten financial years, the total liabilities (including
external debt at current exchange rate) would not exceed fifty per cent of the estimated GDP.
 Reduce revenue deficit by an amount equivalent to one-half per cent, or more of the estimated
gross domestic product at the end of each financial year beginning on the 1st day of April, 2001;
 Reduce revenue deficit to nil within a period of five financial years beginning from the initial
financial year on the 1st day of April,2001 and ending on the 31st day of March 2006;
 Build up surplus amount of revenue and utilise such amount for discharging liabilities in excess
assets;
 Reduce fiscal deficit by an amount equivalent to one-half per cent or more of the estimated gross
domestic product at the end of each financial year beginning on the 1st day of April, 2001;
 Reduce fiscal deficit for a financial year to not more than two per cent of the estimated gross
domestic product for that year, within a period of five financial years beginning from the initial
financial year on the 1st day of April, 2001 and ending on the 31st day of March 2006;
 Not give guarantee for any amount exceeding one-half per cent of the estimated gross domestic
product in any financial year and;
 Ensure within a period of ten financial years, beginning from the initial financial year on the 1st
day of April,2001, and ending on the 31st day of March, 2011, that the total liabilities (including
external debt at current exchange rate) at the end of a financial year, do not exceed fifty per cent
of the estimated gross domestic product for that year.
 Prohibition of direct borrowings by the Central Government from the Reserve Bank of India after
three years except by way of advances to meet temporary cash needs in certain circumstances.
 How the fiscal deficit is bad for inter-generational
equity

Year Revenue Primary Fiscal

Revenue deficit as %
Deficit Deficit Deficit of fiscal deficit
(As per cent of GDP)
1990-91 3.3 2.8 6.6 50.0
1991-92 2.5 0.7 4.7 53.2
1992-93 2.5 0.6 4.8 52.1
1993-94 3.8 2.2 6.4 59.4
1994-95 3.1 0.4 4.7 66.0
1995-96 2.5 0 4.2 59.5
1996-97 2.4 -0.2 4.1 58.5
1997-98 3.1 0.5 4.8 64.6
1998-99 3.9 0.7 5.1 76.5
1999-2000* 3.5 0.8 5.5 63.6
2000-2001(BE) 3.6 0.5 5.1 70.6
 We can see that revenue deficit now
stands at 70 % of fiscal deficit and has
been historically 50 %.
 Yes there is a burden on the future
generations
 The idea behind this that the current generation is
enjoying the benefits of government expenditure but
not paying for them.

 The view is that future generation will pay in form of

ongoing interest payments or in repayment of debt
being incurred

 As government expenditure cannot be quickly reduced

it places the debt on future only.
The "national burden" is defined as the sum
of total taxes and social security contribution
as a percentage of national income. The
current national burden of our country is at
a low level compared to developed
countries. This is because the current
generation is not bearing enough tax
expenses relative to benefits, which they are
receiving, and passing the burden on to the
next generation in the form of fiscal deficits.
In the future, our country's national burden
is projected to rise even more, with the
increase in elderly population.
This example has been taken up to show the effect of
burden on future generations and emphasis the effect
of war between USA and IRAQ.

“Lifetime tax rate” for each generation, with the current

generation’s tax rate equal to 33 percent. Mr. Gokhale has
estimated that the government will spend $31.5 trillion to
meet its current obligations, but the current generation will
pay only $22.1 trillion in taxes over their lifetime, which leaves
a debt of $9.4 trillion This overhang is a huge burden on the
next generation.

Gokhale predicts that the next generation will face a lifetime

tax rate of nearly 50 percent if the government is to meet its
spending obligations.

 Crowding out also can be a burden to the next generation

Also read the article The Political Economy of the
Revenue Deficit. What impact do you think the budget
has on the economy? Support your answers with
relevant data wherever possible.
 Focus of the Union Budget 2003-04 is clearly on
growth via a big push to infrastructure-related
activities.
 The Budget contains specific provisions aimed
at catalyzing meaningful private investment in
activities that have hitherto been the exclusive
preserve of Government.
 Labeled Public Private Partnership (PPP), this
initiative may transform the role of
Government from being a provider of “public”
services to being a purchaser on behalf of users
Union Budget 2003-2004 addresses the following five
objectives

 Continuation of poverty eradication by addressing the

‘life time concerns’ of citizens, covering health,
housing, education and employment;
 Focus on infrastructure development;
 Fiscal consolidation through tax reforms, progressive
elimination of budgetary drags and the introduction of
Value Added Tax.
 Continued focus on agriculture and related aspects
including irrigation
 Enhancing manufacturing sector efficiency, including
promotion of exports
 Key Economic Indicators
 Agriculture and allied sector
 Industry
 Services
 Key Economic Indicators
 Inflation
 Foreign Exchange Reserve
 Exports
Poor history of post-budget
market returns
Budget is consistent with past policy
stance
 Accent on infrastructure
 Retain the soft bias of interest rates
 Push the indirect tax reforms
 Introduce innovative social security
schemes
 Boost capital markets
Revenue Management
Expenditure Management
Deficit Management
Budget at a Glance
Fiscal Policy and Crowding Out
Expansionary Fiscal Policy
 Crowding Out
Crowding out occurs when expansionary fiscal policy
causes interest rates to rise, thereby reducing
private spending, particularly investment.

Is crowding out important?

Monetary policy is accommodating when, in the

course of a fiscal expansion, the money supply is
increased in order to prevent interest rates from
increasing. Monetary accommodation is also referred
as monetizing budget deficits, meaning the Reserve
Bank prints money to buy bonds which the
government pays for its deficit
Is crowding out important?
 Bud-give
 Revenue targets are realistic
 Expenditure provisions inadequate
• Swapping Rs 100,000 crore of state
government debt
• Infrastructure Investment – Rs.60,000 crores
• VAT provisions.
• Retiring high-coupon bonds with banks
• Reduction of CST from 4% to 2%.
 In the End…
Budget 2003 is modest on economic
reforms, strong on tax procedural
reforms, weak on tax policies and
seriously lax on expenditure control and
fiscal deficit. While some specific
industries will gain, the budget is unlikely
to trigger a major revival of investment
and growth, upward pressure on inflation
and interest rate is much more likely.