What is Fiscal Deficit?

February 26, 2013

Indian Economy

India’s fiscal deficit is gone beyond the safer zone. India’s finance minister has finding it difficult to control the fiscal deficit and that is the reason why there are increase in the fuel prices, new service taxes, etc. Out economic growth has come to an meagre 5% which is very low for the past 10 years. We had an impressive rate of growth before 6 years, with an average of 8-9% every year. Another biggest worry is, sharp decline in the export and increase in the imported things which is widen the fiscal deficit. This article explores what is fiscal deficit and how it can be solved by the govt. If you have any questions, please post it in the comments section. If you want to receive the future articles, please subscribe here.

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What is Fiscal Deficit?

When the government’s expenditure is more than the income, this is called as the fiscal deficit. Government’s income includes the taxes, duties, sales of shares in the public sector companies, auction of public resources like spectrum, coal blocks, etc. The expenses include salaries for public sector employees,  pension for retired employees, national security, subsidy for fuel and fertilizers, etc. These are only the sample and the actual list will be huge.

A continuous high fiscal deficit is not a good sign for the economy. Normally the accepted fiscal deficit is denoted as 4-5% of our Gross Domestic Product (GDP). In the current fiscal year, it cross the 5.3% level. For the last couple of years, fiscal deficit keeps climbing to the new level which is not good for the country. It shows our govt. is not able to stimulate the economic growth and we are more depend on the import which would cause steep price increase and end up in the high inflation.

Why high fiscal deficit?

There is no clear answer can be provided for this questions. A simple answer could be wrong economic policies by the policy makers which is making our economy shrink every year. Our govt. has to stimulate the India’s domestic industry output rather than the wholly depend on foreign inflows. If you depend on the  foreign inflows, we are in the risk of uncertainty. If any global crisis looms, the money will be taken away from our country and we will be facing the downturn. The only good solution is, increasing the exports by stimulating the manufacturing industries in India.

India’s 80% of the fuel consumption is imported from the other countries. If the crude oil price increase in the global market (read: Oil price crisis in India), our import expenses will shoot up and the gap between import and export will increase. To avoid this problem, govt. willing to deregulate the oil products. This could be the long term solution, but in short term any increase in the oil prices will have direct impact on common man ( We are already seeing the price increase on every products. This is due to the oil price hikes).

Budget 2013-14

We are few days left for this year’s fiscal budget by our finance minister P. Chindembaram. It is unfortunately last budget before the election. So, this also will be an election budget. Our finance minister should not compromise India’s future growth for nest year’s election. Our state of economy is already in the bad shape. If the govt. wants to give away this budget with free money, who ever take over as next finance minister would have a tough job, because our country will be in very bad position. We have to wait and watch the budget for any good news to handle the fiscal deficit.

I would update the budget announcement in this blog. I will keep writing the tax savings, new policies, etc. announced in the forthcoming budget. Please stay tuned here to receive the updates from me.

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