GS-3, Indian Economy, Uncategorized

Anatomy of revenue deficit

Context: India’s ever growing fiscal deficit and its efforts at fiscal consolidation

Fiscal Deficit– when a govt’s total expenditure exceeds its total revenue

Fiscal Consolidation – policy aimed at reducing govt deficits and debt accumulation

Causes: The “golden rule” of economists suggests one must borrow to invest not to consume. However, India has been borrowing to consume not to invest.

Investment generates economic returns that ultimately allows the govt to increase the size of its consumption expenditure. Borrowing for consumption does not do so and adds to the interest burden on the govt.

Since the enactment of the FRBM act, states have been adhering to this golden rule but not the centre.

FRBM – Fiscal Responsibility and Budget management legislated by parliament in 2003. Its objectives:

  • Institutionalize fiscal discipline
  • Reduce fiscal deficit
  • Improve macroeconomic management
  • Promote fiscal stability in the long term by fixing targets
  • Emphasizes a transparent fiscal management system and equitable distribution of debts over the years
  • Gives flexibility to RBI to undertake moneytary policy to tackle inflation and take corrective measures

Consumoption List: In FY13-

  • Interest payments accounted for 25.2% of total revenue expenditure
  • Subsidies accounted for 20.7% of total revenue expenditure
  • Pay and allowance of central govt personnel accounted for 15.5% of total revenue expenditure (very less by international standards)
  • Expenditure on defence personnel and paramilitary forces.

Conclusion: The central govt has been borrowing to consume and the consequences of this has been structurally weakening its fiscal health over the past 35 years. In the absence of structural reforms, there is no option but to persist with fiscal consolidation.

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