What do you understand by fiscal deficit? Does strict adherence to fiscal deficit benefit economy in longer run? Critically analyse.(250 words)

Fiscal Deficit is the difference between the total income of the government (total taxes and non-debt capital receipts) and its total expenditure. A fiscal deficit situation occurs when the government’s expenditure exceeds its income. The Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003 which set targets for the government to reduce fiscal deficits. The Budget 2019-20 has pegged the fiscal deficit for the year 2019-20 at 3.3% of GDP.

There are lot of expenditure commitments for the government in a growing economy. It has to create infrastructure, provide social expenditure and has to accelerate the process of industrialization.

1. The government need to initiate poverty eradication and employment generation measures to facilitate equality (government as an active economic agent and a facilitator).
2. For all these, high level of government expenditure is needed in the context of lack of money to finance such expenditure.
3. Similarly, when the economic growth is low due to inadequate private expenditure, the government has to spend more. This is possible only by increasing public expenditure using borrowing.
4. Similarly, it has to promote private expenditure by reducing taxes. The last global financial crisis has made resurgence in the use of fiscal policy to escape from a macroeconomic crisis. 

Some countries like Greece and Spain faced crisis because of depending on high level of public debt (fiscal deficit). Fiscal policy should be cautiously and judiciously applied. Otherwise, it will create bad outcomes like a debt crisis. Though fiscal deficit is desirable, the cost for adopting it as a budget practice is also significant in the Indian context:

1. The fiscal deficit in India has low degree of monetisation because of the absence of both budget deficit and monetisation of fiscal deficit. But still it creates inflation because of the demand impact of high level of expenditure by the government.
2. Fiscal deficit is met through borrowing by the government from the open market at competitive rate of interest, which increases the overall interest rate in the economy.
3. Crowding out effect: high level of public borrowings reduces the opportunity of the private sector to borrow and finance their investments.
4. Future interest payment burden for the government increases. Hence it adds to the burden on the future generation. Here, the expenditure is made for the current generation but debt is paid back by the future generation. Hence Fiscal Deficit violates the principle of inter-generational equity.
5. The widening of state fiscal deficit now has more direct implications for interest rates in the economy.

Following are the recommendations of NK Singh committee for fiscal discipline-
1. Committee recommended that the combined debt-to-GDP ratio of Centre and States should be brought down to 60% by 2023(40% Centre and 20 % States) as against existing 49.4% of centre and 21% of states.
2. For fiscal consolidation, the centre should reduce its fiscal deficit from the current 3.5% (2017) to 2.5% by 2023.
3. The central government should reduce its revenue deficit steadily by 0.25 percentage (of GDP) points each year, to reach 0.8% by 2023.
4. The committee has recommended an Escape Clause to accommodate counter cyclical fluctuations such as Boom or Recession or in case of any natural calamities.
5. The Committee proposed to create an autonomous Fiscal Council with a role of preparing multi-year fiscal forecasts, recommending changes to the fiscal strategy, improving quality of fiscal data, advising the government if conditions exist to deviate from the fiscal target, and advising the government to take corrective action for non-compliance with the Bill.

It’s time to align the monetary and fiscal economies. If bank credit growth falls, fiscal deficit may need to go up. If bank credit growth rises, fiscal deficit should reduce. This is particularly true for a growing economy like India. Even though government finances should improve with the stabilization of the goods and services tax, India needs better fiscal management at both the state and Central levels to avoid crowding out the private sector. This will enable higher investment and help attain higher sustainable growth.

17 Comments
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Murari Jha
Murari Jha
2 years ago

q3
MOJO9708E00A65259027

Parth Verma
Editor
2 years ago
Reply to  Murari Jha

Very good answer.
The only scope of improvement is with your intro.
Do give better and layman definition of FD.
Apart from that, good structure and flow.
Points are well placed and explanation good.

Marks
6
project _osiris
project _osiris
2 years ago

3

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Parth Verma
Editor
2 years ago

Do mention the reason for high FD in recent years in India.
In the last part, mention the recommendations of N K Singh committee regarding FD and steps needed to be taken to rein in FD.
Apart from that, the main body is good.
the balance in the answer is good.
Work on your presentation.

Marks
4
Borne
Borne
2 years ago

Please Review

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Parth Verma
Editor
2 years ago
Reply to  Borne

Your intro is good.
Expkanation in the main body is good.
The answer has steady structure and decent flow.
But there are couple of suggestions which are crucial for your answer.
Do mention the reason for high FD in recent years in India.
In the last part, mention the recommendations of N K Singh committee regarding FD and steps needed to be taken to rein in FD.
Without way forward the answer will not have its shine and will be rendered shine less.

Marks
4
Prakhar Bharadwaj
Prakhar Bharadwaj
2 years ago

Ans

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Parth Verma
Editor
2 years ago

Answer is good.
It has all the details which are required in the answer.
Language is good and not over technical.
Your last part and discussions in it are praiseworthy.
Keep writing like this.

Marks
6
Shashank Shekhar Shukla
Shashank Shekhar Shukla
2 years ago

MOJO9725D00D93764057

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Parth Verma
Editor
2 years ago

Hi Shashank
Your course of discussion is good but lack of proper structure and presentation renders the answer ineffective.
As we have been telling you time and again, start using full quota of space provided to you; which are 3 pages.
This is not the way to approach the answer.
No matter how good your points and coverage are, but with this presentation skills its hard to fetch marks.
You can take cue from other students here on how they have approached the same question.
Give more time and depth to your points.
Leave a gap after every point.
Your points are ok but explanation and depth is general and it just touches the tip of the iceberg,
Read the model answer.

Marks
2
sourav singh
sourav singh
2 years ago

Not checked

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Parth Verma
Editor
2 years ago
Reply to  sourav singh

The intro and the main body are excellent.
Your points are good.
Answer till that point is informative.
Good balance in pros and cons regarding adherence to the FD.
But answer lacks way forward.
For that read the model answer. It is an important point.
Otherwise very good and detailed answer

Marks
5
pranab prakash
pranab prakash
2 years ago

Payment ID MOJO9611300N14575632

Parth Verma
Editor
2 years ago
Reply to  pranab prakash

You missed to discuss one important element of the question: ” Does strict adherence to fiscal deficit benefit economy in longer run?”
You instead discussed “Whether FD is sound indicator of economy?”
Good that you mentioned NK Singh committee.
Read the questions carefully and try to stick to the domain of the question and do not go out of the periphery.
Explanation is good overall.
You can now try writing your answer in 3 pages rather than taking half of that space because UPSC gives 3 pages to write answers for 250 words answers.

Marks
2
avani k
avani k
2 years ago

Q3

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Parth Verma
Editor
2 years ago
Reply to  avani k

Good discourse.
Balance is perfect.
All the elements are nicely dealt with.
Explanation is crisp and effective.
Points are well placed and carry proper depth.
Keep writing like this.

Marks
6
SHIVANKAR SHUKLA
SHIVANKAR SHUKLA
1 year ago

is there any provision related to revenue deficit ? are u confirm ?