BUDGET DEFICIT AND

PUBLIC DEBTSharing India Experience

CONTENT

INTRODUCTION

DEBATE ON BUDGET

DEFICITS AND ITS

MEASUREMENT

TREND AND BUILDUP OF

INDIA’S DEBT

FISCAL HISTORY IN

INDIA

EXTERNAL AND

INTERNAL BALANCE :

IMPORTANCE OF FOREIGN FLOWS FOR

INDIA

CURRENTSCENARIO CONCLUSION

INTRODUCTION

THE GLOBAL FISCAL PROBLEM

• The global economy is in the midst of a very serious crisis,not experienced earlier. It includes poor regulatory framework, global imbalances and growing budget deficits in the US, lead country of the episode.

IMPORTANCE OF COUNTRY SPECIFIC STRATEGIES

• The understanding about differences in economic and socio-political condition across nation is important for the developed countries, which is looking for alternative strategies to obtain sustained growth in long term future. The emergence of highly populous countries in forefront of growth trajectory of the global economy cannot be ignored and new dynamics is bound to emerge.the developed countries need to look at these countries and in particular,INDIA differently.

DEBATE ON BUDGET DEFICITS AND ITS MEASUREMENT

KEY ARGUMENT FAVOURING FISCAL EXUBERANCE

• Domestically held debt are not as harmful, while it provides stimulus to private sector

• The spending by the present government could not be treated as burden on future generations

• Even if budget deficits reduce national savings, that in turn do not decrease growth in long term.

KEY ARGUMENT AGAINST FISCAL EXUBERANCE

• Crowding out of private investment• Rise in interest rate and increasing

tax burden to service the debt• Inflationary accommodation• Even if deficit is financed by

domestic borrowing, in the long run it could be inflationary once it became difficult to service the debt

• Increasing national debt leading to sovereign risk

• crises

FISCAL FEDERALISM IN INDIA

FISCAL REFORMS IN INDIARecommendation of 12th Finance commission ,the government enacts Fiscal Responsibility and Budget Management(FRBM) Act 2003, which seeks to reduce and maintain fiscal deficit to 3% of GDP bt the central and states governments under a time frame.

The central government extends guarantees primarily on loans from multilateral/bilateral agencies to various public sector undertakings/ public sector financial institutions.

The 13th Finance commission was mandated to find justification and method of inducing Goods and Services tax (GST) in order to further simplify taxation and removing double taxation and export of taxes

TREND AND BUILDUP OF INDIA’S DEBT

CHANGING STRUCTURE OF INDIA’S DEBT

CURRENCY AND INSTRUMENT COMPOSITIONOF

INDIA’S EXTERNAL DEBT

EXTERNAL AND INTERNAL BALANCE: THE IMPORTANCE OF FOREIGN FLOWS FOR

INDIA

CURRENT SCENARIO

CRISES OF 1991By 1985, India had started having balance of payments problems. By the end of 1990, it was in a serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had been reduced to such a point that India could barely finance three weeks’ worth of imports which led the Indian government to airlift national gold reserves as a pledge to the International Monetary Fund (IMF) in exchange for a loan to cover balance of payment debts

INTERPRETATIONS

continuous decrease in capital expenditure or revenue deficit of the central government,

throughout increase in borrowing/debt of the central government,

constant increase in loans and advances given by the central government,

initially revenue receipts were more than revenue expenses, but then there is a continuous decrease in revenue receipts leading to revenue deficits.

India’s deficit and debt dynamics can be characterised as adverse on following grounds:

While deficit is increasing, the share of capital formation out of budget is

decreasing. Therefore, income multiplier to government

expenditure may not be enough to cover the debt liability in long run.

Government debt dynamics is unstable with large variability and

therefore, it lacks credible predictability of future path.

Exposure of the economy to non-government external debt in

increasing and therefore, there is a case to conduct analysis about the

economic returns to such borrowings in terms of long terms sustainability.

CONCLUSION

REFERENCE

Source (basic data): Reserve Bank of India and Central

Government Budget Documents; India’s External Debt: A Status

Report Ministry of Finance(various) .

www. rbi.org.in

www. finmin.nic.in

www. india.gov.in

GROUP 2:Garima GoyalAnju MauryaAbhishek JaiswalJyoti RajKunal Khatri