Definition

“Fiscal deficit is an economic phenomenon, where

the Government's total expenditure surpasses the
revenue generated. Deficit Financing refers to means
of financing this excess expenditure.”
Concept & Meaning

 Western Context

 Indian Context
Deficit Financing as an aid

 Deficit financing during war.

 Deficit financing during depression.

 Deficit financing and economic development.

Budgetary Surplus & Deficit
 Early 1980s:Fiscal gap consistently negative

 Late 1980s:large deficit averaging about 8% of GDP

 Post liberalization: Fiscal deficit began declining

 LPG effect was till 1996-1997

 2001:Fiscal deficit increased to 10% of GDP.

 2003:FRBM was adopted

 FRBM improved the transparency in budgetary policy

 As a result fiscal deficit decreased to 7% of GDP

 In 2007-2008 fiscal deficit was 5.5 %

 Shot up to 8 % in 2008-2009
Government Expenditure
2007-08(Cr) 2008-09(Cr) 2009-10(Cr)
Employee
compensation 45963 70944 87581

Subsidies 70926 1,29,243 1,11,276

Pensions 24261 32,690 34,980

Farm debt waiver 0000 15,000 15,000

NREGS 14400 36,750 39,100

Total expenditure 7,12,671 9,00,953 10,20,838

Fiscal deficit 6 7.8 6.9

Source-economic times 1 feb

Fiscal Deficit (as % of GDP)
Fiscal Deficit (in crores of Rs.)

Source ministry of finance govt. of india

Government’s Revenue

 Revenue Receipts

 Capital Receipts
Revenue Receipts
Capital Receipts
Government Expenditure

 Revenue Expenditure

 Capital Expenditure
 Revenue Expenditure

Source: ministry of finance govt. of India

 Capital Expenditure

Source: ministry of finance govt. of India

Domestic Sources

 Taxation

 Public Borrowings

 Government Savings

 Printing Currency
Sources
 Income tax (9%)
 Borrowings and other liabilities (34%)
 Non-tax revenue (12%)
 Service tax and other taxes (5%)
 Union Excise Duties (9%)
 Customs (8%)
 Non-debt capital receipts (1%)
 Corporate tax (22%)
Additional Sources

 Disinvestment

 3 G Auction
 Government Expenditure

Source: ministry of finance govt. of India

 Government Expenditure

Source: ministry of finance govt. of India

Interest payments (as %of revenue receipts)

2004-05 41.5

2005-06 38.2

2006-07 34.6

2007-08 31.6

2008-09(RE) 34.3

2009-10(RE) 36.7
Foreign Sources

 Loans

 Grants

 Private Investments
Deficit Financing and Inflation

 Developed Country

 Developing Country
– Sudden rise in monetary incomes
– Investment on Capital Goods
– Supply vs. Demand of Consumer Goods
– Industries with long gestation periods
– Velocity of circulation of money
– Credit Creation
Deficit Financing as an Aid

 Investment in Consumer Goods

 BoP Deficit as a counter measure

 Controlled Liquidity

 Inflation helps economic development

– Savings in developed countries
– Capital formation in developing economies
Impact on Prices
 First 5 year plan (1951-56) – expansion in money supply short
of increase in output

 Second Plan (1956-61) – actual financing short of target

 Third Plan (1961-66) – abnormalities (‘62 & ’65 war), deficit

financing more than double the target

 Fourth Plan (1969-74) – ’71 war, Bangladesh refugees, oil

price hike, deficit financing about 2.5 times target

 Post 1975, deficit financing has been in excess of target

leading to price rise
 Extent of tolerance is called the safe limit of deficit
financing

 It is not possible to quantify it, but desirable to identify

the factors that affect it

 Factors that affect deficit financing

– factors related to demand for money and
– factors related to supply of money
Factors Affecting Safe Limit
 The supply elasticity of consumption goods in the
country

 Nature of government expenditure for which new

money is created

 If the foreign exchange reserves are increasing

 Time lag between the initial investment and the flow of

final products
 Large speculative business community

 Government implementation of its economic policies

 Inflationary phase in the country

 Rate of growth of population is high

 Country's tax structure and the borrowing schemes

In a developing economy

 Rigidities in the tax system

 All these factors exert their influence simultaneously

 Change in the economic conditions of the country