deficit financing final
TRANSCRIPT
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Definition
Fiscal deficit is an economic phenomenon, wherethe Government's total expenditure surpasses therevenue generated. Deficit Financing refers to meansof financing this excess expenditure.
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W estern Context
Indian Context
C oncept & Meaning
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Deficit financing during war.
Deficit financing during depression.
Deficit financing and economic development.
Deficit Financing as an aid
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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
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2007-08(Cr)
45963
70926
24261
0000
14400
7,12,671
6
Employeecompensation
Subsidies
Pensions
Farm debt waiver
NREGS
Total expenditure
Fiscal deficit
2008-09(Cr)
70944
1,29,243
32,690
15,000
36,750
9,00,953
7.8
2009-10(Cr)
87581
1,11,276
34,980
15,000
39,100
10,20,838
6.9
Source-economic times 1 feb
G overnment Expendit u re
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Fiscal Deficit (as % of G DP)
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0
50000
100000
150000
200000
250000
300000
350000
1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08a 2008-09 2008-09
Fiscal Deficit
FiscalDeficit
Source ministr of finance ovt. of india
Fiscal Deficit (in crores of Rs.)
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G overnments Reven u e
Revenue Receipts
Capital Receipts
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Reven u e Receipts
0
100000
200000
300000
400000
500000
600000
700000
1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08a 2008-09 2008-09
R evenue receipts
Revenue receipts
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C apital Receipts
0
50000
100000
150000
200000
250000
300000
350000
400000
1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08a 2008-09 2008-09
Capital R eceipts
Capital Receipts
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G overnment Expendit u re
Revenue E xpenditure
Capital E xpenditure
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Reven u e Expendit u re
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08a 2008-09 2008-09
R evenue Expenditure
Revenue Expenditure
Source: ministry of finance govt. of India
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C apital Expendit u re
0
20000
40000
60000
80000
100000
120000
140000
1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08a 2008-09 2008-09
C apital Expenditure
Capital Expenditure
Source: ministry of finance govt. of India
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Domestic So u rces
T axation
Public Borrowings
Government Savings
Printing Currency
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Sou rces
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%)
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A dditional So u rces
Disinvestment
3 G Auction
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G overnment Expendit u re
Source: ministry of finance govt. of India
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G overnment Expendit u re
Source: ministry of finance govt. of India
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4 1.5200 4 -05
38.22005-06
34 .62006-07
31.62007-08
34 .32008-09(RE)
36.72009-10(RE)
I nterest payments (as %of reven u e receipts)
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Foreign So u rces
Loans
Grants
Private Investments
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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
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Deficit Financing as an A id
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
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I mpact on Prices
First 5 year plan (1951-56) expansion in money supply shortof increase in output
Second Plan (1956-61) actual financing short of target
T hird Plan (1961-66) abnormalities ( 62 & 65 war), deficitfinancing more than double the target
Fourth Plan (1969-74) 71 war, Bangladesh refugees, oilprice hike, deficit financing about 2.5 times target
Post 1975, deficit financing has been in excess of targetleading to price rise
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E xtent of tolerance is called the safe limit of deficitfinancing
It is not possible to quantify it, but desirable to identifythe factors that affect it
Factors that affect deficit financing
factors related to demand for money and factors related to supply of money
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Factors A ffecting Safe Limit
T he supply elasticity of consumption goods in thecountry
Nature of government expenditure for which newmoney is created
If the foreign exchange reserves are increasing
T ime lag between the initial investment and the flow of final products
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Large speculative business community
G overnment 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
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In a developing economy
Rigidities in the tax system
All these factors exert their influence simultaneously
Change in the economic conditions of the country