Deficit Financing in India

Abstract

The Indian public no longer looks to the Budget speech with great expectations. Policy announcements more and more are not reserved for the time of the presentation of the Budget. Corporates and individuals await the Budget nowadays only for its announcements on taxation measures. The Interim Budget of 2009 did not have anything to offer on this count - being basically a vote on account, it kept clear of any tax initiative on ground of convention and propriety. It is another matter that within a week after the Budget the Government announced a series of indirect tax reductions and fiscal measures :::osting Rupees 30000cr to the exchequer and causing further deterioration to the fiscal situation. The most prominent feature of this Budget is the sharp increase in the revenue and fiscal deficits. They are in serious danger of further worsening, as the present indications are that our economic growth will be lower than the estimates in the Budget. The revised estimates of 2008-2009 have raised the fiscal deficit to 6% and the revenue deficit to 4 .4 % of the GDP- much higher than what was estimated in the Budget. The consolidated fiscal deficit including offbudget items like oil and fertilizer bonds and the spiraling deficits of the State Governments, tends to exceed 12% of the GDP. This has led to Standard and Poor threatening to downgrade our long term credit rating from 'stable' to 'negative'. The evils of deficit financing of this order are well known. It damages economic growth by neutralizing the liquidity stimulus extended by the RBI to the Banking sector, squeezing out credit for corporate growth and damaging the external sector. Despite this, the overriding justification is the Keynesian doctrine that governmental spending pump primes the economy in times of recession. This is accepted and followed across the globe today. The Indian public no longer looks to the Budget speech with great expectations. Policy announcements more and more are not reserved for the time of the presentation of the Budget. Corporates and individuals await the Budget nowadays only for its announcements on taxation measures. The Interim Budget of 2009 did not have anything to offer on this count - being basically a vote on account, it kept clear of any tax initiative on ground of convention and propriety. It is another matter that within a week after the Budget the Government announced a series of indirect tax reductions and fiscal measures :::osting Rupees 30000cr to the exchequer and causing further deterioration to the fiscal situation. The most prominent feature of this Budget is the sharp increase in the revenue and fiscal deficits. They are in serious danger of further worsening, as the present indications are that our economic growth will be lower than the estimates in the Budget. The revised estimates of 2008-2009 have raised the fiscal deficit to 6% and the revenue deficit to 4 .4 % of the GDP- much higher than what was estimated in the Budget. The consolidated fiscal deficit including offbudget items like oil and fertilizer bonds and the spiraling deficits of the State Governments, tends to exceed 12% of the GDP. This has led to Standard and Poor threatening to downgrade our long term credit rating from 'stable' to 'negative'. The evils of deficit financing of this order are well known. It damages economic growth by neutralizing the liquidity stimulus extended by the RBI to the Banking sector, squeezing out credit for corporate growth and damaging the external sector. Despite this, the overriding justification is the Keynesian doctrine that governmental spending pump primes the economy in times of recession. This is accepted and followed across the globe today.