{"id":54329,"date":"2020-01-24T16:42:00","date_gmt":"2020-01-24T11:12:00","guid":{"rendered":"https:\/\/blogadmin.forumias.com\/?p=54329"},"modified":"2020-02-26T16:43:30","modified_gmt":"2020-02-26T11:13:30","slug":"7-pm-will-the-budget-suspend-the-frbms-fiscal-deficit-goals24th-january-2020","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/7-pm-will-the-budget-suspend-the-frbms-fiscal-deficit-goals24th-january-2020\/","title":{"rendered":"7 PM |Will the Budget suspend the FRBM\u2019s fiscal deficit goals?|24th January 2020"},"content":{"rendered":"\n<p><strong>Context:\n<\/strong>Upcoming\nbudget and the fiscal deficit.<\/p>\n\n\n\n<p><strong>More\nin news:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Finance Minister Nirmala Sitharaman is\nset to present her second Union Budget on February 1, 2020.<\/li><li>The fiscal deficit for FY20 and its\nroadmap for FY21 could be heading towards a recalibration with the February\nBudget slated to hint at the targeted 3 percent fiscal deficit for the next\nfinancial year be pushed to 2022-23<\/li><\/ul>\n\n\n\n<p><strong>Present\nstate of Economy:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>The Indian economy has been slowing down\nsince 2016-17 when real GDP growth had peaked at 8.2 per cent. <\/li><li>According to the CSO\u2019s advance\nestimates, it has fallen to 5 per cent in 2019-20 \u2014 the lowest since 2008-09,\nwhich was the year of the global economic and financial crisis. Nominal GDP\ngrowth in 2019-20 is expected to be 7.5 per cent, which is the lowest level\nsince 1975-76 \u2014 a 44-year low.<\/li><li>India\u2019s ongoing slowdown has been\naccompanied by the erosion of saving and investment rates since 2011-12, when\nthese had peaked at 34.6 per cent and 39 per cent of the GDP respectively,\nmeasured in current prices. Since then, the saving and investment rates have\nfallen steadily to 30.5 per cent and 32.3 per cent respectively in 2017-18.<\/li><li>This persistent erosion of the saving\nand investment rates has reduced India\u2019s potential growth rate to close to 6.5\nper cent. In fact, the fall in actual growth is even below this reduced\npotential growth at 5 per cent in 2019-20.<\/li><li>This is due to weak aggregate demand,\nand priority has to be given to stimulating the overall demand using monetary\nand fiscal policy tools.<\/li><li>The financial system \u2014 and more\nparticularly, the banking system \u2014 is in distress. The non-performing assets\nratio of public sector banks as of September 2019 stood at 12.7 per cent. The\nnon-banking financial companies are also under pressure, and any further\ndeterioration in their position would also affect the banking system.<\/li><li>On the monetary side, the RBI has\nreduced the repo rate since January 2019 by 135 basis points in five\nincremental steps. However, the transmission mechanism has been extremely slow\ndue to problems and rigidities in India\u2019s financial sector.<\/li><li>Any room for further reduction in the\nrepo rate does not appear to be round the corner, as the CPI inflation rate has\nspiked in December 2019 at 7.35 per cent, which is well outside RBI\u2019s comfort\nlimit of 6 per cent. All eyes are, therefore, on Budget 2020-21 and the\navailable fiscal policy options.<\/li><\/ul>\n\n\n\n<p><strong>Fiscal\nDeficit:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Fiscal Deficit is the difference between\nthe Revenue Receipts plus Non-debt Capital Receipts (NDCR) and the total\nexpenditure.<\/li><li>In other words, fiscal deficit is\nreflective of the total borrowing requirements of Government.<\/li><\/ul>\n\n\n\n<p><strong>Significance\nof fiscal deficit:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>The significance of fiscal deficit is\nthat if the deficit is too high, it implies that there is a lesser amount of\nmoney left in the market for private entrepreneurs and businesses to\nborrow.&nbsp;<\/li><li>The lesser amount of this money will in\nturn leads to higher rates of interest charged on such lending. Hence, a higher\nfiscal deficit means higher borrowing by the government which in turn means\nhigher interest rates in the economy.<\/li><li>Currently, the high fiscal deficit and\nhigher interest rates in India means that the efforts of the Reserve Bank of\nIndia to reduce interest rates are undone.<\/li><li>It reveals the overall\nstrength in an economy. Global investors watch the number as they fear a high\nfiscal deficit may crowd them out from the market and high inflation and\nhigh-interest rate regime can impact their profitability.<\/li><\/ul>\n\n\n\n<p><strong>Acceptable\nlevel of fiscal deficit:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>There is no set universal level of\nfiscal deficit that is considered good. In a developing economy, where private\nenterprises may be weak and governments may be in a better state to invest,\nfiscal deficit could be higher than in a developed economy.<\/li><li>In India, the Fiscal Responsibility and\nBudget Management (FRBM) Act requires the central government to reduce its\nfiscal deficit to 3 percent of GDP.<\/li><li>In Union Budget 2019, India has set a\nfiscal deficit target of 3.3% of the Gross domestic product (GDP) for 2019-20.<\/li><\/ul>\n\n\n\n<p><strong>What\nhappens if fiscal deficit shoots up? <\/strong><\/p>\n\n\n\n<p>The government\nhas to borrow more or ask RBI to print more money. But the printing of currency\nhas its side effects. It leads to inflation and raises interest rates.\nTherefore, no government wishes to finance the fiscal deficit by printing\nmoney. It prefers borrowing.<br>\nFrom a high of 5.9% in 2011-12, fiscal deficit has been brought down to 3.5% in\n2017-18. The target was to achieve 3.3% in 2018-19. During the Budget in July\n2019,&nbsp;Finance minister Nirmala Sitharaman reduced the fiscal deficit\ntarget to 3.3%&nbsp;from an earlier 3.4%&nbsp;for 2019-20 in a move that\nsignalled&nbsp;the government&#8217;s commitment to fiscal consolidation.<\/p>\n\n\n\n<p><strong>Available\noption:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Increasing household disposable income\nthrough concessions in the personal income tax and\/or making additional income\ntransfers through schemes such as the Kisan Samman Nidhi.<\/li><li>Increase government expenditure\ndirectly. Here also, the increase can be in revenue expenditure or capital\nexpenditure. The most effective policy option is to increase government\nnon-defence capital expenditure.&nbsp;<\/li><li>Non-defence capital expenditure may,\ntherefore, have the most immediate and stimulating effect. It will also be in\nline with the recently proposed National Infrastructure Pipeline.&nbsp;<\/li><li>Given the revenue constraints, a\nsuitable push to government non-defence capital expenditure would require a\nrelaxation of the fiscal deficit limit.&nbsp;<\/li><li>The government could induct public\nsector borrowing requirements along with the central government\u2019s deficit or\nborrowing data. <\/li><li>The foreign savings may be used to\nfinance the additional deficit to avoid further stress on markets. It is for\nthe government to ensure that the borrowings are exclusively utilised for\ninvestment spending.<\/li><li>The reform agenda must be carried\nfurther. While there are many things that require to be done, one area that\nneeds immediate attention is the financial sector. Restoring the financial\nsystem to a healthy state is a must for reviving the economy.<\/li><li>Over the medium term, a serious look is\nneeded on the extent of public ownership of banks and also the relationship\nbetween government and the management of public sector banks.<\/li><\/ul>\n\n\n\n<p><strong>Way\nforward:<\/strong><\/p>\n\n\n\n<p>Ideally, the 3\nper cent fiscal deficit limit should be implemented over an economic cycle and\nnot every year. During the years in which there is an economic slowdown, the\nfiscal deficit limit should automatically be increased to 3.5 per cent of the\nGDP or more. In years of better economic growth, it should be brought down\nbelow 3 per cent; the problem is that this has not happened so far.<\/p>\n\n\n\n<p>The government\nshould keep forward the true economic and fiscal narrative in front of the\nnation so as to understand the real opportunities and challenges.<\/p>\n\n\n\n<p><strong>Source:\n<\/strong><a href=\"https:\/\/www.thehindu.com\/opinion\/op-ed\/will-the-budget-suspend-the-frbms-fiscal-deficit-goals\/article30636439.ece\">https:\/\/www.thehindu.com\/opinion\/op-ed\/will-the-budget-suspend-the-frbms-fiscal-deficit-goals\/article30636439.ece<\/a><strong><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Context: Upcoming budget and the fiscal deficit. More in news: Finance Minister Nirmala Sitharaman is set to present her second Union Budget on February 1, 2020. The fiscal deficit for FY20 and its roadmap for FY21 could be heading towards a recalibration with the February Budget slated to hint at the targeted 3 percent fiscal&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/7-pm-will-the-budget-suspend-the-frbms-fiscal-deficit-goals24th-january-2020\/\">Continue reading <span class=\"screen-reader-text\">7 PM |Will the Budget suspend the FRBM\u2019s fiscal deficit goals?|24th January 2020<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[130,955],"tags":[],"class_list":["post-54329","post","type-post","status-publish","format-standard","hentry","category-7-pm","category-7-pm-brief-infograph","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704748512},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/54329","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=54329"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/54329\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=54329"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=54329"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=54329"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}