Fiscal deficit in plain and simple term is the difference between the ever increasing expenditure and small income. Fiscal deficit is the total expenditure (capital and revenue) minus the total income of the government. In a developing country like ours we cannot aim for a utopian situation of zero fiscal deficits but the least we could do was to have a deficit with constitutes more of capital expenditure. Fiscal deficit is measured as a percentage of GDP and for India it stands at a not so pleasant figure. Let’s make the things direct and less of economic mess.

Suppose you have 100 bucks as income and 150 bucks as total expenditure you want to do. For spending 150 bucks you need to raise additional resources like borrowing from friend (if he is that generous after all). Now Rs. 50 will be your fiscal deficit.

Now as always, the devil lies in the details. The problem here is whether you are going to spend the 50 rupees as a onetime expenditure for buying a bike or is it a recurring expenditure like treating your girlfriend. The next month, supposing your income remains flat and you need more money as you are again not able to make ends meet, your friend shows true spirit of altruism and friendship and is providing you “loans” without asking for the principal amount immediately and just demands the interest. Now as it is you are in need of more money and add to that the interest liabilities.

The problems get compounded. You now start curtailing on the capital part (i.e. creating new assets.. no bike modifications !!!). Your new loans are just for running the system (petrol got heck lot expensive dude!).. A scenario is reached when the interest payment by you requires loans from him. And this is the situation when things have got messed up.

To correlate, this is exactly the situation that India is in. We have a huge revenue deficit which is caused when you just don’t have enough money to pay for running the system. So you keep on borrowing even to pay for the interest. The government unlike you has many many friends which are in “compulsion” to provide loans. There is the RBI and banks from which government borrows vigorously and also the government has the supreme power of printing more currency. The government floats bonds – government securities on which it pays interest and these securities are completely risk free (you got to trust them!).

The other form of financing the deficit – deficit financing by printing money has even more damaging results. If the government prints money to finance the deficit and production does not increase immediately, this leads to increased inflation as more money in the economy chases the same amount of goods. This is generally why fiscal deficit is seen as not being good for the economy. Classic example of this is shown by Robert Mugabe led Zimbabwe where inflation is hitting… hold your breath… 300,000%! This shows how rampant printing of currency by government defying all logic can do “wonders” with the economy.

Now in order to contain the draconian devil, the government living up to its reputation of making things too tedious came out with an act – Fiscal Responsibility and Budget Management Act (FRBMA) which mandates the government to reduce the fiscal deficit by at least 0.3 % every year and wipe out revenue deficit – difference between the revenue expenditure and the recurring income by march ‟09. In order to meet these strict guidelines the government took help of some innovative techniques; showing the vastly increasing oil bonds and fertilizer subsidies as an off budget expenditure so as to not include it into the deficit and now it claims that it is going on the target to meet its commitments as mandated by the act…!!

The solution lies in government working more to take subsidized fuel away from someone who is driving imported SUV and not on devising nefarious ways to hide facts from the people.

Savil Gupta

BITS – Pilani