Understanding budget series: So what really does fiscal deficit mean? Part 1

(This is the first of the five-part series that will explain the numbers in the Budget)

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Budget is akin to ‘Rob Peter to pay Paul’. Government collects money from one set of people (tax payers) and gives out the money to another set of people (expenditure on various government schemes). Government has long stopped printing its own money to spend. If they resume, prices would spiral as more money notes will chase few things to buy. So, governments collect taxes from individuals and companies, and then spends the money on different things like defence expenditure, paying salaries/ pensions to employees, interest payments on past borrowings etc.,

When sum of taxes and non-taxes (like dividends from government-run companies) is not enough to meet the sum of all expenditure, the difference or deficit is called as ‘fiscal deficit‘. This year (that is twelve months ending March 2017), the deficit is estimated at 3.5% of GDP or Rs 533,904 crore.

To contextualize this number, lets compare the fiscal deficit with total expenditure of Rs 1,978,060 crore. This means government borrowed more than one rupee for every four rupees it spent.

Next question is how did the government bridge the deficit? Where else, the government borrowed from public, though not directly.

Having fiscal deficit is not necessarily a bad thing, if spent wisely on building infrastructure to enable faster movement of goods and people, or in helping more people into schools and colleges. But that’s not what is happening. A large part of borrowing is primarily to meet today’s expenditure like paying salaries for government employees or interest payments. So how much of borrowing or fiscal deficit is used to meet today’s expenses is captured by ‘revenue deficit‘.

Revenue deficit for current financial year is estimated at 2.3% or Rs 354,015 crore. In other words, two-thirds of borrowings is to meet today’s expenses. If the trend continues, country will slowly and surely get caught in debt spiral.

So what is the ideal situation?
1. Revenue deficit has to be reduced to zero. This is like earning Rs 10,000, but spending Rs 12,000 on monthly basis.
2. Whatever is borrowed to meet the fiscal deficit should create assets that should generate future streams of benefits.

What we are doing now is to burden the next generation to finance our fiscal profligacy.

(Part 2 will look at how much we pay our government employees). 

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News in Numbers, Nov 1, 2016: Getting to the pulse of the problem…

120

What is it? The number of days a new variety of arhar dal (red gram or pigeon pea) – Pusa Arhar 16 – takes to mature. The dwarf pigeon pea has been created by scientists at the Indian Agricultural Research Institute.

Why is it important? This is less than the 160-270 days that other varieties (in use) take to mature without any loss in yield (20 quintals/hectare) and uses less water. Arhar dal is among the most widely consumed pulses in the country. The rates of pulses, a price-sensitive commodity, shot up to Rs 200 per kg last year and such a variety with a less maturity time could help plug the supply-demand gap in India. The government is hoping to release the variety for cultivation by January next year.

Tell me more: Domestic production of pulses declined to 16.5 million tonnes in 2015-16 due to two straight years of drought, falling from a high of 19.25 million tonnes in 2013-14. The government is targeting to increase pulses production to 24 million tonnes by 2020-21.

 

8

What is it? The number of terror suspects from the banned Students’ Islamic Movement of India (SIMI) who were killed in an encounter, according to Madhya Pradesh police officials.

Why is it important? These activists had killed a prison guard and escaped from the Central Jail in Bhopal, police officials said. However, there have been serious questions raised about the authenticity of the event after unverified videos of the shooting between the state police and the fugitives where the former are seen shooting at inert bodies (as opposed to the official version that the activists were killed in ‘retaliatory’ firing) while another one purportedly shows five of the suspects waving, which could mean that they were trying to turn themselves in.

Tell me more: SIMI is an Islamic terrorist organisation which aims to convert India into an Islamic nation and was set up in 1977 in Uttar Pradesh. The organisation is believed to have been responsible for the bomb blasts in commuter trains in Mumbai in 2006 and another in Gujarat in 2008.

 

40.2 lakh

What is it? The number of differently-abled people in the age group of 5-19 years who were attending educational institutions, according to new Census 2011 data released on Monday.

Why is it important? This is an improvement of 11% (in terms of attendance among the differently-abled population) since 2011 though it is still about 10% behind the enrolment numbers of the general population. Those with ‘any other disability’ had the highest share of people attending educational institutions (71.2%) followed by those with visual disability (68%) and hearing difficulty (67%). Those suffering from a mental illness had the lowest percentage of people attending classes.

Tell me more: There are about 65.7 lakh differently-abled people in the 5-19 age group in India of which 61.2% are attending educational institutions, 12.1% who had attended one earlier while 26.7% who had never attended any. There is a significant difference between the share of differently-abled boys attending educational institutions and that of girls: 56.7% compared to 43.3%.

 

Rs 4.48 lakh crore

What is it? India’s fiscal deficit (difference between government’s revenue and expenditure) in the first six months of 2016-17.

Why is it important? This is 83.9% of its total Budget estimate of Rs 5.34 lakh crore for 2016-17 compared to 68.1% of the budget in the corresponding period. This is the highest in the first six months of a financial year since 1998-99 mainly due to an increase in public spending and higher salaries. Government spending is important to boost economic growth even as the private sector remains cautious about investing in key sectors such as infrastructure due to high interest rates and debt levels.

Tell me more: Revenue inflows from disinvestment, black money scheme and the recently-concluded spectrum sale are likely to help the government achieve its fiscal deficit target of 3.5% of the gross domestic product.

€100 million (Rs 730 crore)

What is it? The reported remittances by Russian arms firms into accounts of companies controlled by arms dealer Sudhir Choudhrie, his family and close associates in 12 months, according to secret documents accessed by the Guardian and the BBC. British company Rolls-Royce has reportedly paid £10 million to firms linked to the businessman.

Why is it important? It is illegal to pay secret middlemen to win defence deals in India. This raises questions about the deals signed by India with Rolls Royce for procuring Hawk aircraft engines and its defence deals with Russia. The billionaire and former Delhi resident through his lawyers has told the BBC that he has not bribed government officials or acted as an illegal middleman in defence deals. Choudhrie has been investigated by the Central Bureau of Investigation (CBI) and the Enforcement Directorate for any wrongdoing in the past.

Tell me more: Choudhrie’s name figures as one of the 23 “unscrupulous persons” on a list of “undesirable contact men” (compiled and disseminated by the CBI), whose authenticity has been challenged by him.

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India’s latest GDP Numbers: Five things you must know

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Growth has slowed down: Asia’s third largest economy grew at 7.1% in quarter ended June 2016. This is the slowest in five quarters, and much lower compared to 7.9% recorded in the preceding three months.

Manufacturing picks up, but corporate investment still down: Manufacturing registered 9.1% growth in first quarter of current fiscal, as compared to 7.3% in same quarter last year. So this alone contributed one-fifth of India’s GDP growth.
However, corporate investment dipped by 3% (or by Rs 21,009 crore as measured in 2011-12 prices).
What does this say? Demand might have picked up resulting in higher manufacturing output. But not enough for the companies to see the invest in additional capacity.
When Indian economy was growing at 9% plus for five years in 2000-10, investment demand accounted for nearly half of the growth.

Government spending spurts: Nearly a fifth of GDP growth in latest quarter is due to government spending. This is clearly not sustainable as it would lead to widening fiscal deficit. Higher fiscal deficit will increase cost of borrowing for all others in the economy.

Exports finally showing growth: After many quarters of decline, exports reported a 3% increase. This is a positive as many export oriented industries are manpower-intensive sectors. This will create more jobs.

Mining, hotel, construction industries have slowed down

 

The positives: stable private consumption, growth in exports, pick up in manufacturing output.

The negatives: higher government spending not sustainable, key industries like mining and construction still sluggish, and corporate investment yet to pick up.

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