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)


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, Apr 18, 2016: States reducing rural spend, Tamil Nadu’s freebie culture…


What is it? The number of states that have reduced their rural spending in absolute terms in 2015-16 compared to the previous year.

Why is it important? The cutback in rural spending – for example, in agriculture, rural infrastructure and irrigation – comes during the second consecutive year of drought. One reason is the reduction in state revenues from their share in central taxes and grants in aid, which declined by 0.3% of GDP in 2015-16.

Tell me more: Of the 14 states that reduced rural spending, five cut down on their overall spending in 2015-16. This also raises the question if states have shifted their expenditure from rural spending by using the spending freedom got due to the implementation of the 14th Finance Commission recommendations.

~Rs 15,000 crore

What is it? The value of freebies provided by the Tamil Nadu government between 2006 and 2016, first five under M Karunanidhi’s DMK and the next under J Jayalalithaa’s AIADMK.

Why is it important? Raises questions about the economics of freebies, especially when the state’s revenue deficit (net amount received is lesser than projected net amount to be received) is estimated to nearly double to Rs 9,155 crore in 2016-17 from the previous year. The freebies offered by DMK and AIADMK included rice at single-digit prices per kg, fans, mixers, gold, laptops, bicycles and television sets.

Tell me more: In response to a 2013 Supreme Court order, the Election Commission updated its Model Code of Conduct rules and said parties should not make promises that impair the quality of the election process or exert undue influence on the voters. The rules also require the parties to explain the rationale behind the poll promises and broadly state the financial means by which they would implement them.

$38.06-$40.86 per barrel

What is it? The prices at which the global benchmarks of crude oil (US and Brent crude futures respectively) were trading at around 6 am (Indian Standard Time) today.

Why is it important? Crude oil prices were down by 5.7% and 5.2% respectively from their last closing. This was due to the failed attempt by major oil-producers to curb their output at January levels to arrest falling oil prices, at their Doha meet on Sunday. This gives rise to concerns about continued global oversupply of crude and low oil prices in the near future.

Tell me more: Barclays estimates Brent to average at around $36 a barrel in the second quarter of this year.

$37,584 (~ Rs 25 lakh)

What is it? The value of Tesla Motors CEO Elon Musk’s total compensation in 2015.

Why is it important? Musk does not take salary from Tesla, and this amount is as per California’s minimum wage requirements. Musk has a 26.5% stake (as of December 31) in the company, worth around $9.47 billion. He received stock options worth $5.27 million in 2012 to compensate him for 10 years.

Tell me more: Other CEOs who got low compensation are Facebook’s Mark Zuckerberg who received $1 as salary in 2014 (along with additional compensation of $610,455) and Twitter’s Jack Dorsey whose compensation was valued at $68,506 last year.

$37 million

What is it? The amount Yahoo President and CEO Marissa Mayer would receive if she leaves after Yahoo is sold off.

Why is it important? Telecom firm Verizon and Daily Mail General Trust (owner of MailOnline website) are expected to submit their bids to takeover Yahoo’s core business today.

Tell me more: Yahoo’s revenue has fallen by 8.5% since 2012 (Mayer was appointed CEO in July 2012) to $4.09 billion in 2015 while its adjusted profit has nearly halved to $0.95 billion during the same period. If Marissa Mayer is fired before the company is sold off, she would still receive $13 million, per reports.

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