[Answered] “Focus on fiscal deficit alone; as an economic management tool is not full proof.” Discuss.

Demand of the question
Introduction. What is fiscal deficit?
Body. Constraints of fiscal deficit as economic management tool.
Conclusion. Contextual conclusion.

Fiscal Deficit is the difference between the total revenue of the government and its total expenditure. A fiscal deficit situation occurs when the government’s expenditure exceeds its income. High fiscal deficit means that the government has been spending beyond its revenue. Many government target fiscal deficit for a stable economic growth. India target to retain fiscal deficit around 3-3.5% of GDP.

Issues with fiscal target as sole focus:

  1. Indian government target to keep fiscal deficit at 3-3.5% of the gross domestic product. The scientific basis for this figure is not known. Whether 3% figure is good or bad for economy is arguable.
  2. The fiscal deficit reflects the overall imbalance in the Budget. A fiscal deficit does not always reflect status of revenue accounts of the government which indicates whether the government is saving or spending more than it receives. One cannot deduce the soundness of economic management from a mere reduction in the fiscal deficit. Revenue deficit is also important.
  3. It is argued that fiscal deficit targeting, rewards economies. But the impact of fiscal deficit targeting on soundness of economy is yet to be established scientifically. The slowdown of exports and the rise in unemployment suggest that fiscal deficit targeting has not led to desired result.
  4. The Government of India (GoI) doesn’t borrow from overseas to fund FD. It is funded mostly out of domestic savings. GoI can run high levels of FD without triggering a currency crisis. This is the exact opposite of theory of targeting FD to prevent crisis as was seen in Russia, Argentina, Greece where high FD triggered economic crises.
  5. In practice, fiscal policies may be applied inappropriately because fiscal deficit sometimes miscalculate the true constraints in budget and give a misleading picture of the economy’s fiscal stance. For diagnosing economic problems and finding appropriate fiscal policies to address them, the correct measurement of the public sector’s requirements is important. To understand a country’s fiscal stance, it may be necessary to view the budget from several angles.
  6. Any error in accounting or false numbers by government lead to the failure of fiscal deficit as a measure to convey fiscal health. Involvement of other measurements like revenue deficit would reflect the right situation.
  7. Fiscal deficit as a sole indicator hides a number of ambiguities and usage date. Problems include the accounting and the gap between the budget and macroeconomic developments.
  8. It is evident that the measurement of the deficit has significant policy implications. Thus only fiscal deficit as economic management tool may lead to bad policy formulation and implementation.
  9. The basic issue in slow Indian economic growth is lack of demand. Thus there is need to stimulate demand. Obsession with targeting FD jeopardises government expenditure and thus limit growth and ability to service debt in the long term.
  10. To meet the target, the government imposes arbitrary spending cuts on maintenance and on critical investments in social and physical infrastructure. This result in lowering of national productivity, leading to lower long-term growth.

Fiscal Responsibility and Budget Management (FRBM) law was enacted in 2003 to enforce discipline through prescribed targets. Unfortunately, this has led to focus of elected representatives on a key policy tool to react to economic distress. For better economic management and long term economic growth other factors and measures should be considered along with fiscal deficit.

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