Budgetary system is an all-time important tool to accelerate the economy specially in the countries which have excess capacity and underutilized resources. By tools like, taxation and public expenditure it is possible for the fiscal policy maker to undertake the measures that would help build the infrastructure and create employment. Though it is important that budgetary tools are crucial in economic system, it is equally significant to understand that the budgetary task is constrained by several factors making it a timebound and limited exercise.
Normally in the budgetary exercise, tax rates, public expenditure on various schemes, capital expenditure and capital receipts are some of the important means to achieve the fiscal targets. Since the budgets are in accounting framework, it is possible to compare the residual at the end which creates evaluative scope for judging the performance of the government on fiscal front. So, the surplus or deficit on budget being a public account need critical understanding which continues to be an important issue in terms of maintaining fiscal discipline in a country like India. Considering the budgets of successive governments in India, it has been a common feature that almost all governments ran deficits on budgets. There are of course several causes of high budgetary deficits which are common in countries with fiscal activism. As Ronald Reagan rightly pointed out, ‘We don't have a trillion-dollar debt because we haven't taxed enough; we have a trillion-dollar debt because we spend too much’. This self-explanatory statement reveals the fact that fiscal deficit emerges out of poor tax collection or high expenditure. Therefore, this deficit being an important challenge has several policy implications both in the short run and long run. Fiscal deficit implies the limited fiscal space for the government to increase development expenditure which in turn means that development finance is closely connected to fiscal deficit with an inverse relation. Also, fiscal deficit creates room for public debt and if borrowed externally the liability burden is too high. Hence, it is pertinent to control the fiscal deficit considering its cascading effect on development activities in the economy.
There are some critical issues applicable to fiscal deficit in India as follows:
1. Fiscal deficit on Union budget has trickle down effect on subnational fiscal framework considering the fiscal federalism in India.
2. Overall budgetary deficit on public accounts i. e. revenue, fiscal and primary deficit needs to be addressed together instead of treating them in isolation.
3. It is the high time to revisit the 3% fiscal deficit target that emanates from Fiscal Responsibility and Budgetary Management Act (FRBM) for several reasons.
4. An integrated framework for treating consolidated deficit (Centre plus State governments’ deficit) is highly required.
5. GST rates for different items need a relook in view of the revenue losses of the state governments in India.
Based on the issues mentioned above, fiscal deficit on budget continues to be a critical parameter for our policy framework and there are continuous policy programs to control this deficit within a tolerable limit. More importantly, the fiscal discipline of controlling deficit is strongly related to the monetary rule of inflation targeting. Hence for the success of inflation targeting the fiscal rule must be followed.
On the backdrop of Covid – 19 pandemic it is important to note that there will be certain permanent changes in our policy making which demand more focus more on social indicators of development like, education and health care system. Given the vulnerable condition of poor and backward sections of our society which are badly hit by the pandemic it is obvious that heavy budgetary allocations are made for food security, education, health infrastructure and health research including Covid – 19 vaccination in this budget. Based on these expenditure estimates it was expected that the deficit target won’t be met and there will be a revenue loss. As per the expectations the fiscal deficit for the current fiscal year is estimated to be 9.5% and for the next year it will be 6.8%. The government argues to bring down the deficit to 4.5% by 2024-25 to come back to the normalcy. Undoubtedly the capex and inevitable revenue expenses contribute to the deficit which need to be carefully planned. The long-term trend in fiscal deficit on union budget is described as follows:
On account of the deficit trend shown in the diagram above, it is clear that some serious efforts are required to control the deficits and accelerate the economy post the pandemic. Because the ever-increasing deficit calls for deficit financing measures including internal and external borrowing which amounts to the debt burden. The debt servicing mechanism contains various ways which are described in the diagram below:
In view of the various ways of deficit financing the increasing market borrowings result in crowding out effect and so on. Hence, in order to avoid the spiral and cascading effect of deficit and deficit financing it is important to mitigate the budgetary deficits. So the only key factor here is to follow fiscal austerity for keeping the deficit under control and improving the quality of capital expenditure. We also need efforts to improve our taxation system to make it progressive. Hence, it is strongly advised to fiscal authorities that, ‘let’s budget the budget’.
Author’s Information:
Ms. Aparna Kulkarni
Asst. Professor, Economics
St. Xavier’s college, Mumbai.
7768027658
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