- A fiscal deficit occurs when a government’s total expenditures exceed the revenue that it generates, excluding money from borrowings.
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- Fiscal deficit leads to excessive Government borrowing from the market which causes rise in market interest rate that in turn reduce private investment, and it reduces the resources available for private sector investment.
- The large fiscal deficit is financed by borrowing from the Reserve Bank of India which issues new currency (which is called reserve money or high-powered money) for the government. This causes greater expansion in money supply and generates inflationary situation in the economy.
- Thus, to check the rate of inflation, fiscal deficit must be reduced through both raising revenue of the government and reducing government expenditure. Other measures also include borrowing from domestic sources, borrowing from external sources and deficit financing (printing of new currency notes).
- The reduction in fiscal deficit will prevent the emergence of excess demand in the economy and thereby help in controlling inflation and achieving price stability.
- Fiscal deficit is advantageous to an economy if it creates new capital assets which increase productive capacity and generate future income stream. On the contrary, it is detrimental for the economy if it is used just to cover revenue deficit.
Measures to reduce the fiscal deficit:
These measures can be studied under two heads, they are:
By reducing government expenditure:
- A drastic reduction in expenditure on major subsidies such as food, fertilisers, exports, electricity to curtail public expenditure.
- Reducing the huge amount of money that is spent by the government on LTC (Leave Travelling Concessions), bonus, leave encashment etc.
- The government has to reduce interest payments on past debt.
- Funds raised through disinvestment in the public sector should be used to retire a part of old public debt rather than financing current expenditure, which will quickly reduce burden of interest payments in future.
- Budgetary support to public sector enterprises other than infrastructure projects should be substantially reduced, and they should be asked to raise funds from the market and banks.
- Curtail unnecessary expenditure in all government departments.
By raising revenue of the government:
- Mobilising resources to increase public revenue.
- Policy of moderate taxes with simplified taxation structure should be followed.
- High marginal rates of taxes should be avoided as they serve as disincentives to work more, save more and invest more and cause evasion of taxes.
- The tax base should be broadened for both direct and indirect taxes. This can be achieved by withdrawing exemptions and deductions provided in the income and wealth taxes, taxing agricultural incomes and incomes derived from unorganised industrial and services sectors, etc.
- Steps should be taken to curtail black money, tax evasion and corruption and prevented them by strict enforcement of the tax laws.
- Mobilise more resources through indirect taxes, more commodities should be brought within the tax net.
- Various tax concessions should be withdrawn to collect more revenue from taxes and the social objectives should be served by adopting more effective policy instruments.
- Public sector enterprises should be restructured so that they should make some surpluses at least for their own development so that their dependence on government’s budgetary resources should be dispensed with.