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Fiscal Deficit Constrains for India

iasparliament
February 05, 2018
6 months
1523
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What is the issue?

  • India’s fiscal deficit is growing much than expected due to Lower revenue realisation and the rise in expenditure.
  • Measures needs to be taken to achieve the fiscal deficit target of 3.3% of the GDP for 2018-19 FY.

What are the measures of the government on fiscal deficit?

  • Union government had inherited a fiscal deficit of 4.4 % of GDP in FY14 and it was steadily brought it down to 3.5 % in 2017.
  • Sharp fall in oil prices and rapid economic growth helped the government to reduce the fiscal deficit between years 2014-2017.
  • In budget 2018-19 the fiscal deficit target has been set at 3.3%, and the target of 3% has been postponed to FY 2020-21.

What are the challenges before the government?

  • India's fiscal deficit till the end of November 2017 has already breached the target and touched 112 per cent of the budget estimate for 2017-18 due to higher expenditure.
  • The present situation is more difficult as growth faltered in FY17 and the first half of FY18 and oil prices started rising.
  • There is a revenue shortfall on account of lower tax collection under the GST and MSMEs are yet to picking up.
  • The government has a plan to raise additional market borrowings of Rs 50,000 crore through dated government securities, as a whole this may have much consequences on the fiscal targets.

What will be the consequences of rising fiscal deficits?

  • Higher government expenditure will push up demand and generate more money in the economy which may lead to higher inflation.
  • The government in order to repay its debt would likely to levy more taxes in the future.
  • Higher fiscal deficit also leaves little room for interest rate cuts which would affect private investments from taking off.
  • Borrowing costs may remain high for consumersand industry/companies which might stall economic growth

What measures needs to be taken?

  • Fiscal consolidation is important from the point of view of the credibility of policy-making.
  • Though there is an improvement in the tax to GDP ratio after the anti-tax evasion steps, gains from tax revenues was lost on account of non-tax revenues.
  • Framing a proper asset monetisation plan will help a lot in generating non-tax revenues as the government is among the largest owners of property and immovable assets in the world.
  • Thus the non-tax revenue needs to be boosted by a structured long term plan which will help in outlining the course of action and help provide predictability to the earnings from non-tax revenues.
  • The government need to have a strong hold on its divestment and non-tax revenue targets to achieve the fiscal deficit target of 3.3%.

 

Source: Business Standard, Business Times

Quick fact

Revenue receipts

  • Revenue receipts are divided into tax and non-tax revenue.
  1. Tax revenues constitute taxes like income tax, corporate tax, excise, customs, service and other duties that the Government levies.
  2. The non-tax revenue sources include interest on loans, dividend on investments.

Sources of non-tax revenue receipts

  • These are not generated by taxing the public, it will be generated from profit making public enterprises (PSUs).
  • Interest which the Government earns on the money lent by it to external or internal borrowers.
  • Thus this revenue receipts may be in foreign currency as well as Indian Rupees.
  • The money which the government receives out of its fiscal services such as stamp printing, currency printing, medal printing etc.
  • Money which the Government earns from its “General Services” such as power distribution, irrigation, banking services, insurance, and community services etc. which make the part of the Government business.
  • Money which the government accrues as fees, fines, penalties etc. also comes under non tax receipts of the government.

 

Source: Business Standard

 

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