Thursday, January 28, 2010


The inflation is going up every day and all concerned are also worried about the fiscal deficit of India now. We feel this is the right time to control the fiscal deficit in case the country's actual development (not better growth rate) is expected. The government of India expected last year almost 9% growths. But in reality it has attained only 7.5%% growth till now. There was no improvement in condition of below poverty level people inspire of improved growth rate. We don’t care for better growth rate unless it improves the condition of BPL people. Under the circumstances it has become imperative to control fiscal deficit surely. Many people have asked what Fiscal Deficit is and why it creates problem for the economy of the country.

According to us fiscal deficit is an economic phenomenon, where the government’s total expenditure surpasses the revenue generated. It is the difference between the government's total receipts (excluding borrowing) and total expenditure. Fiscal deficit gives the signal to the government about the total borrowing requirements from all sources.

The primary component of fiscal deficit includes revenue deficit and capital expenditure. The capital Expenditure 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.

In India , 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).

According to the view of renowned economist John Maynard Keynes, fiscal deficits facilitate nations to escape from economic recession. From another point of view, it is believed that government needs to avoid deficits to maintain a balanced budget policy.

According to Keynesian economic theories, running a fiscal deficit and increasing government debt can initially stimulate economic activity only when a country's output (GDP) is below its potential output. But when an economy is running near or at its potential level of output, fiscal deficits can cause high inflation. At that point FISCAL DEFICIT MUST BE CONTROLLED.

In order to relate high fiscal deficit to inflation, some economists believe that the portion of fiscal deficit, which is financed by obtaining funds from the Reserve Bank of India , directs to rise in the money stock and a higher money stock eventually heads towards inflation. IN India ACTUALLY THIS HAS HAPPPENED NOW.

We recommend that the government should not delay disinvestment process. Luckily the central government has taken up dis investment in right earnest. As soon as this action is taken fiscal deficit would come down. According to us Fiscal deficit can be reduced by bringing up revenues or by lowering expenditure. The ensuing budget can be tough. The finance minister may WITHDRAW SOME OF THE CONCESSION GIVEN LAST YEAR in direct and indirect taxes.

Fiscal deficit reduction has an impact over the agricultural sector and social sector. Government's investments in these sectors may have to be reduced be reduced, or alternatively new source of revenue generation must have to be sought through LARGE DISINVESTMENTS.

Finance Minister Pranab Mukherjee did say that India will not be able to sustain high fiscal deficit in the long run, but he did not give any timeframe for withdrawing the stimulus measures that inflated the deficit. Prime Minister Manmohan Singh shared expressed his government's intent to wind down stimulus measures next year. But would it be wise to exit the stimulous now?Mr. Mukherjee told reporters in St.Andrews, Scotland, that he had already told Parliament high fiscal deficit was not sustainable in the long run.

India's fiscal deficit is projected to be 6.8 per cent of GDP this fiscal, consequent to duty sops given last year to the industry to insulate it from the effects of the global economic crisis. This figure must be reduced now to 4%. During the ensuing budget surely FM would withdraw concessions granted last year in duties and in income tax. RBI is expected to take stringent measure by promoting dear money policy shortly to contained inflation.but inflation can not be controled alone by monetary policy unless backed by availabilty of commondities and reasonable cost.

In its pre-budget memorandum 2010-2011, Confederation of Indian Indsutry (CII) stressed on the importance of reducing the fiscal deficit to 5 per cent (of GDP) over the next fiscal versus the current level of 6.8 per cent.It advised the Ministry of Finance to aim at maintaining and further accelerating the recovery process, along with focusing on correcting the fiscal deficit which is at an undesirable level. Now the question is how to reduce Fiscal Deficit?

Our recommendations include rationalization of expenditure, augmentation in revenue, disinvestment of public sector undertaking, enhancing the efficiency of funds spent on various flagship programs like NREGA among others.

On the revenue front, CII suggested a system through which Rs 50,000 crore from Rs 2 lakh crore, held up in various disputes and litigations for a long time, could be unlocked by resolving one quarter of the existing disputes. CII suggests measures such as facilitating negotiations, out of court settlement, establishing fast trials Court to achieve this.

Besides this, Rs 40,000 crore can be raised through disinvestment. And the revenues from both these measures, along with that from higher tax collection and through 3G telecom auction Fiscal deficit could be expected to be reduced easily .According to CII, this can materialize a saving of 0.8 percentage point in fiscal deficit. We Largely AGREE WITH THE RECOMMENDATION OF CII.

CII's recommendations on indirect taxes include continuation of 10pc rate of peak customs duty, abolition of customs duty on inputs such as non-coking coal, PETROLEUM coke, scrap of non-ferrous metals, Ferro-nickel etc, and continuation of the general rate of excise duties at 8 per cent level.

On direct taxes, CII has asked for reduction in MAT rate along with demanding extension of sunset clause under section 10 A and 10 B beyond Mar 31, 2011 for next 5 years as IT/ITEs sector are key contributors to foreign exchnge earnings and many companies are in the process of setting up undertaking in these areas.

The pre-budget memorandum also mentions measures, such as the need for increase in depreciation rates on plant and machinery to 25 per cent and to extend the scope of investment--linked-tax-incentive, which was offered to select sectors during Union Budget 2009-10, to the entire manufacturing sector.


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