India's Fiscal Deficit and Related Issues

India’s Fiscal Deficit and related issues: * India’s fiscal deficit is 5.2 % of India’s GDP. * Reduction in government expenditure allowed central banks to loosen monetary policy and effectively stimulate private investment and consumption. * Challenges in fiscal deficit- the existing fiscal deficit leaves no space for extra govt. spending on areas of social priority. It reduces the growth of human and physical capital. * It reduce the private sector’s ability to obtain bank financing. * There are two things that matter in government-debt dynamics. First consideration The simple r-g assumption is one of the most important in debt dynamics: an r-g of greater than zero (when interest rates are greater than GDP growth) means that the debt stock increases over time. An r-g of less than zero causes it to fall. r- real interest rate , g –GDP growth * The second consideration is the primary budget balance. A primary budget surplus causes the debt stock to fall, by allowing the government to pay off some of the existing debt. A primary deficit needs to be financed by further borrowing.

Components of Fiscal deficit: * Revenue deficit: It is an economic phenomenon, where the net amount received fails to meet the predicted net amount to be received. * Capital expenditure: It is the fund used by an establishment to produce physical assets like property, equipments or industrial buildings. Capital expenditure is made by the establishment to consistently maintain the operational activities.
The fiscal deficit is financed by obtaining funds from Reserve Bank of India , called deficit financing. The fiscal deficit is also financed by obtaining funds from the money market (primarily from banks).
Problems with high fiscal deficit:
Revenue deficit: * 76% of gross fiscal deficit, only 24% of deficit went for productive areas i.e. add to future supply of goods and services. * 24% resources does not generate enough return to to service