Fiscal Deficit and Economic Growth

The planning commission deputy chairman rightly opined that growth takes precedence over deficit. In other words, the commission would like to concentrate on the economic growth now and about the deficit later. At present the fiscal deficit in Indian economy is about 11% of GDP. The governments goal is to bring it down to 3% of the countrys GDP. The exclusive deficit of the central government is about 7% of the GDP. Some statistical organisations put India among some of the very high fiscal deficit economies. Five year plans and investment The public investment for the development of the country has been increasing since 1951. For better services and to provide employment to the educated and skilled Indian citizens the public sector units came in to existence. Over the years due to mismanagement of these units, these have become a burden on the Indian economy though some of them have been contributing to the growth in the economy. Rural development, Industrial development, human resource development, etc are some of the priorities in the five year plan periods for the over all economic development of India. Free technical training for the educated but poor youth to enhance their skills has been one of the primary motives of the government as their skills contribute in producing goods and services and thus the economic growth of the nation. Electricity, transportation, communication, education, health, credit facilities, marketing, irrigation, etc are some of the vital and basic necessities for the economic development of the nation. The countrys security is of utmost importance. Defence expenditure is very high in India. This is due to several boarder and other territorial disputes with the neighbouring nations like Pakistan, China, etc. Due to ever increasing fiscal deficit, the government has been privatising and also slashing many subsidies. In other words the government has been moving towards more openness and reforms. Some economists also opined that the government can get Rs.25,000 crores annually if it moves towards disinvestment. Governments support services The human resources development is one of the primary objectives of any government. In India too the government spends huge sums on this sector so that they can contribute to the development and growth of the nation. For instance there are free education schemes for poor, subsidies on fee, lower interest loans for higher education abroad and in India. Similarly there are many kinds of subsidies for the farmers as agriculture has been a source of livelihood for many and also as it contributes to the economic growth and development of the nation. The government also bears the burden of promoting the exports by subsidising, promoting and supporting the export oriented industries. This measure is to reduce the trade deficit. Containing the huge fiscal deficit The centres fiscal deficit for the first two months ( April and May) of the current financial year is about Rs. 90, 758 crores. This is mainly due to indirect tax cuts by the government to deal with the economic slow down. For instance, the excise duty on most products was reduced by 6% points and the service tax was cut by 2% points. These measures would induce demand by reducing the prices and thus production and employment. Fiscal deficit for May 2009 was Rs. 36,600 crores as tax receipts dipped by 10%, this is mainly due to the decline in indirect tax collections. In the month of April 2009, the fiscal deficit rose to 64% due to increasing governments expenditure. Sixth pay commission awards, declining tax revenues, etc are some of the contributors for this state of affairs. The government employees have been demanding increase in perks as the prices of essential commodities and other expenditure have been rising. The declining tax revenues are due to, 1. Cenvat (central value added tax) was cut from 14% to 10% and then to 8%. 2. service tax from 12% to 10%, and 3. The reduction in customs duty on several items resulted in 17% decline in gross tax revenues. Thus in the month of April 2009, the effective collection of personal income tax which has increased by 20% is the only bright spot. The rise in expenditure bill for April month was due to increase in the non-plan expenditure. This expenditure includes, recurring expenditure on completed projects, salaries, and subsidies. Fertiliser, and defense expenditure contributed for the heavy expenditure. Spending needs to be better targeted to reduce wasteful expenditure. For instance, 1.The government can withdraw some tax concessions, 2.The third generation mobile licence auctions will yield Rs.25,000 crores

to it. and 3. Disinvestment of loss making public sector units will yield about Rs. 80,000 crores. These steps will bring deficit back to about 6.5% of GDP. Due to political compulsions, the governments task would be tough as it has to make some best choices which are not popular measures to garner votes.