Fiscal Deficit in INDIA – Is it worrisome?

The recent discussions on the Economic growth of developed and emerging nations are all talking about fiscal deficit. In the past few months there was debate going on, on India’s Fiscal Deficit. Whether it is acceptable or it’s too high, what may be the consequences, etc. Before going further on India’s fiscal deficit let me come back to the basic definition of Fiscal Deficit.

BASIC  LESSONS:

What is Fiscal Deficit?  

        

The fiscal deficit is the difference between the government's total expenditure and its total receipts (excluding borrowing). The components of the fiscal deficit are (a) the revenue deficit, which is the difference between the government’s current (or revenue) expenditure and total current receipts (that is, excluding borrowing) and (b) capital expenditure. The fiscal deficit can be financed by borrowing from the Reserve Bank of India (which is also called deficit financing or money creation) and market borrowing (from the money market that is mainly from banks).

India's Fiscal Deficit during Eleventh Five Year Plan (2007-12)

2007-08	2008-09	2009-10	2010-11	2011-12
2.5	6.0	6.5	5.2	5.8

Source:  Data Tables, Planning Commission; Note:  2010-11 Quick Estimates and 2011-12 Advanced Estimates

Is Fiscal Deficit is really a necessary evil or is it really bad? Well to answer this question we need to do some introspection about the economic conditions first. It is not easy to say that fiscal deficit is bad or necessary evil for any economy. It depends entirely on the economic conditions of the country. If Government is borrowing money for some productive purpose through which economic productivity will be increased then fiscal deficit is not bad at all. If an economy like India is investing money in infrastructure and social sector (to have better standard of living) which is properly utilized then Fiscal deficit is not bad or evil.

       

Then one needs to understand why many economist say Fiscal Deficit is bad? Fiscal deficit becomes worrisome or bad when it becomes large and persistent for few years. If it becomes large and persistent then it means that Government is spending money (through borrowing) on unproductive purpose that does not stimulate the economy to move further. When there is a large Fiscal Deficit then there is a significant chance for high level of inflation. When there is high inflation and large Fiscal Deficit then it will lead to fall in value of (or) weaker national currency which is turn reduce the credit-worthiness of the country!

My Perspective:

Now coming back to the news that everybody is concerned about Fiscal Deficit and many ratings firms downgraded India by citing the Fiscal Deficit and Inflation. Is India is really doing bad? Well, if one does a good research on this subject then he will find out the real truth! Yes, India's Fiscal Deficit to GDP is high; no doubt in it, but, at the same time India has the capacity to absorb Government Spending (through borrowing). But, what really concerns is that the  Government Spending (through borrowing) is not happening largely in productive manner. This is one of the reasons for the prevailing high level Inflation rate. This does not mean that India is doing badly; this means that India should be more vigilant on the area of spending (through borrowing). India's Fiscal Deficit will be acceptable only when its Government Spending (through borrowing) happens in more productive manner.  

I wanted to clarify, one thing, that in recent past many Economists, Researchers, and Analyst quoted that this much percentage of Fiscal Deficit is acceptable for any economy or some particular economy. But, I personally believe as what I said earlier that it  depends on economic conditions and capacity of the country. There is no benchmark or ideal percentage for the Fiscal Deficit (as a percent of GDP)