Is Fiscal deficit and public

debt threatening long term

growth
SUBMITTED BY : GROUP 4

ABHISHEK 309
AKANSHA 310
AKSHAY 312
DIVYA 322
DIVYANSHU 323
ISHITA 325
WHAT IS FISCAL DEFICIT?

The difference between total revenue and total expenditure of the government, it tells us
how much the government exceeds the set budget

Generally takes place due to revenue deficit or due to a spur in capital expenditure i.e. to
create long term assets such as infrastructure

Financed through debt from either the central bank or from other capital markets by issuing
debt instruments such as treasury bills and bonds

Net Fiscal
Deficit
Fiscal Deficit
Gross Fiscal
Deficit
IMPACT OF FISCAL DEFICIT

It leads to excessive government borrowing from the market which in-turn leads to
increase in market interest rate. Higher market interest rate leads to reduction in
private investments which further reduces the available resources for the private
sector investments.

The extent to which a large fiscal deficit is financed by borrowing from the Central
Bank which issues new currency (which is called reserve money) for the government.
This causes greater expansion in money supply through the process of money
multiplier and generates inflationary situation in the economy. Thus, to check the rate
of inflation, fiscal deficit has to be reduced through both raising revenue of the
government and reducing government expenditure.
PUBLIC DEBT AND HOW IT RELATES TO FISCAL
DEFICIT?
The public debt is defined as
how much a country owes to
lenders outside. These will
include individuals,
businesses, and foreign
governments

Regular Fiscal Deficit leads to

growth accumulated public
debt as the government
need to depend on external
sources for funds

Fiscal deficit is a stock

concept whereas Public
Debt is a flow concept
IMPACT OF PUBLIC DEBT

In the short run drives

economic growth. Result of populist
Good Debt

Bad Debt
decisions
Safe way for foreigners to
invest in a country by buying
bonds Higher debt leads to
higher return rates for
investors
Much more attractive than
investing in the stock market
Effects foreign
investment in the long
Used judiciously, public debt run
improves the standard of
living in a country

High Current Account

Spurs citizens to spend more
now, instead of saving for
Deficit
retirement
INDIAs ECONOMIC JOURNEY

Post Indias economy divided

into private and public.

Independence Government in charge

of consumer services

(1947) 5 year development

plan adopted

Economy worsened
Growing inflation,
unemployment and
Early 1990s poverty
Gulf war affected Indias
foreign reserve
Fell to $240mn

Liberalization in Tariff levels lowered

Exchange rate policy

1991 reformed
Relaxation in FDI

Highly talented
technical work-
IT Boom post force
1991 R&D centers shifted
to India
Driving Forces behind Economic Growth
1. Increased Foreign Direct Investment
2. Expertise in Information Technology
3. Increased domestic consumption because of growing middle class population

Increased
FDI India became $1.823tn economy in 2011
because of liberalization and privatisation
Expertise in IT

Increased
consumption

But still >40% live on $1/day & >25%

New jobs
below poverty line

Increased
consumption

Increased
Steps need to be taken for rural upliftment
FDI
and promote manufacturing sector
CURRENT SCENARIO- Fiscal Deficit

India's fiscal deficit during April-August

touched 96.1% of the budget estimate for the
full fiscal year that ends on March 2018
The deficit was 76.4% of the full-year target
during the same period a year ago
The main reason for the current fiscal deficit is
due to the increase in expenditure
For 2017-18, the government plans to bring it
down to 3.2% of the GDP
According to reports, the government plans
to sell bonds to raise funds for the extra
expenditure
Greater focus on quality of expenditure and
higher tax realization from the huge cash
deposits in banks, triggered by
demonetization
CURRENT SCENARIO Public Debt

Internal debt constituted 93% of public debt

as of June 2017
Marketable securities accounted for 83.2%
The debt (excluding liabilities under the
Public Account) of the government was Rs
61.84 lakh crore at the end of December
2016
According to the reports, the liquidity
conditions in the economy remained
comfortable and continue to be in surplus
mode during the quarter post the
demonetization
Measures taken by GoI

In contract to a deficit rule, a spending rule would allow automatic stabilisers to

work on revenue side

To improve governments stability and accountability, India should establish an

independent fiscal council

The personal income tax could raise more revenue and better contribute to
vertical and horizontal equity

Government is shifting towards debt-to-GDP ratio as a measure of economic

performance

Making growth more inclusive includes giving equal opportunities to poor

RECOMMENDATIONS

GST
1. Will take some time to be fully implemented
2. Lack of clarity on rules and regulations
3. Increased compliance and shortage of skilled labour
4. IT systems need to be abreast with the change
Gold
1. Educating the population for investments other than gold
2. Encourage Gold ETF
3. Impose quantitative restriction on gold imports
Improve PSU
1. Problems of low capacity utilization
2. Better Management
3. Foreign investments
4. Disinvest ?