Effects of Deficit Spending on the Growth of India

December 15, 2018 admin 0 Comment

These levels are believed to be far higher than the tolerance limits of our economy. With the Budget of 1991-92, an attempt was made to bring these levels down. In five years ending 2007 08, government made an effort in reducing revenue and fiscal deficits through augmenting revenue on the one side and controlling non-plan expenditure on the other.

Centre’s fiscal deficit at 2.5% of GDP in 2007 08 signified the attainment of FRBMA terminal year target, albeit on cash basis. However, there was sharp deterioration in the fiscal position in 2008 09 owing largely to global commodity price rise and financial meltdown. The slippage in terminal year fiscal targets has also been accentuated by supplementary Demands for Grants on account of farm loan waiver, implementation of

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Sixth Pay Commission award and funding on the projects prioritized in Eleventh have Year Plan. According to Economic Survey 2008-09 fiscal and revenue deficit of Central were at 6.0% and 4.5% of GDP respectively. In 2009-10, gross fiscal deficit was 6.3% and revenue deficit was 5.1% and in 2010-11, gross fiscal deficit was 4.8% and revenue deficit was 3.5%.

For the year 2011-12, the target is: fiscal deficit —4.8% and revenue deficit -3.4%. For the year 2012-13, the target is – fiscal deficit —4.1% and revenue deficit -2.7%. The reader shall notice a growing gap between Fiscal deficit and Primary deficit.

The difference, it would be recalled, is on account of net interest payments by Government of India, and has been increasing rapidly on account of cumulative indebtedness of the government on account of deficit spending in the past.

It should be noted that the impact of deficit spending on indebtedness of the government gets camouflaged if the concept of deficit used is that of budgetary deficit. Cumulatively growing indebtedness is better reflected through Fiscal deficit.

We may conclude by saying that there is an imperative need to scale down deficit spending by the government quite drastically. Unfortunately, it is not easy to do so due to various reasons including its committed expenditure on interest payments, the need to spend on defence, and its inability to cut on its civil administration.

At the same lime, there is a need to increase expenditure on programmes of poverty alleviation, employment generation and infrastructure. Ways and Means Advances (WMA).

The method of deficit financing or monetisation of the government deficits, as practised so far was discontinued with effect from April 1, 1997. It was replaced by Ways and Means Advances scheme. This step was taken following the agreement reached between Central Government and the Reserve Bank of India (RBI) on March 26. 1997.

In subsequent years, the entire requirement is being met through the ‘ways and means’ advance (WMA) system and market borrowing. The WMA is an overdraft facility from the RBI. The facility is available for 10 days. The interest rate on WMA and overdraft are linked to the repo rate.

Under the new scheme of WMA the RBI provides facilities for temporary accommodation of the financial needs of the government up to a ceiling (or limited amount) fixed in advance.

The government’s receipts (through taxes, etc.) fall short of government expenditure. To meet this gap the RBI allows from time to time the government to draw upon the credit extended by it.

The credit/loan thus drawn has to be repaid or in technical language the government vacates WMA from time to time. As a result, the WMA will be reduced to zero at the end of the financial year. Thus, the WMA is purely a mechanism to bridge the temporary mismatch between the government’s receipts and expenditure.

While it is a gap-tilling device, it cannot be drawn upon to any amount as limits have been fixed on the maximum amount that can be availed of by the government. For example, in terms of the agreement, referred to above, the limit for the agreed limit on Reserve Bank of India’s Ways and Means Advances (WMA) for the Centre was placed at Rs. 20,000 crore and Rs. 6.000 crore for the period April-September 2008, and October-March 2008-09, respectively.

As a transitional measure, the government was allowed to overdraw these limits, called overdraft facility. For the first two financial years (i.e., 1997-98 and 1998-99) this overdraft facility was for an unlimited period within a year. But alter March 1999; no overdraft facility has been permitted for more than 10 consecutive working days.

Another feature of the scheme is the interest charged on WMA and overdraft facility. Loans under WMA will be charged interest that is related to the repo. The interest on the overdraft will be higher by two percentage points above that charged for WMA.

The minimum balance required to be maintained by the Government of India with RBI will not be less than Rs. 100 crores on Friday, on the date of closure of the Government of India’s financial year and on June 30, and not less than Rs. 10 crore on other days.

In addition to the WMA, there is also a provision for the support to be extended by the RBI for the government’s market borrowing programmes. RBI will do this by subscribing to the government’s securities. The financing of the fiscal deficit is still largely through borrowings and other liabilities.

This borrowing from RBI is akin to the monetised deficit. However, the actual monetary effect may be lower than the figure seems to suggest. The reason is that the RBI through open market operations can sell off government securities, and thereby, mop up excess liquidity in the economy. It is also necessary to add that the new scheme envisages fixing up the limit for monetised deficit every year.


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