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Fiscal Deficit and Balance of

Payments

By:

Akshaya

(1020734)

Amala Gadde(1020735)

B. Madhulika

(1020737

Mahija Reddy

(1020758)

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Part I

Fiscal Deficit

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Fiscal Deficit

A deficit is the amount by which a sum of money falls

short of the required amount.

A government's deficit can be measured with or without

including the interest it pays on its debt.

Fiscal deficit is the excess of total expenditure(both

revenue and capital a/c) over revenue receipts and only

non-debt type of capital receipts such as recoveries of

loans.

The primary deficit is defined as the difference between

current government spending and total current revenue

from all types of taxes.Primar deficit = fiscal deficit interest a ments

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Financing for fiscal deficit

Fiscal deficit can be financed in two ways:

Borrowing by the government from the market, bothinside and outside the country.

On this borrowing , the Govt has to pay rate of interest

annually.

Apart it has to pay back the internal and external debt

taken.

Borrowing from the RBI which issues new notes

against Govt securities, which is popularly called as

DEFICIT FINANCING.

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Implications of fiscal deficit

Borrowing from within and outside the country leads to increase in

PUBLIC DEBT and its burden.

Support through deficit financing leads to creation of new money and rise

in prices or INFLATION.

To check inflation and achieve price stability, world bank have

recommended that fiscal deficit in India should be reduced to 3% of GDP.

To reduce fiscal deficit to 3% requires drastic cut in non-productive

revenue expenditure.

Large deficits adversely affects Economic Growth.

Due to large revenue deficit, a very large part of borrow funds by the

Govt is used to finance current consumption expenditure of the Govt.

As a result , a smaller part of resources are left for productive

investment in infra strucutre and social capital by the Govt, which lowers

the rate of economic growth.

More borrowing by the Govt leaves less resources for private sectorinvestment

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Measures to reduce Fiscal deficit

Large fiscal deficit has two bad cosequences

Excessive Govt borrowing from market causes rise in market interest rate

which tends to reduce private investment. Further it reduces the resources

available for private sector investment.

Greater expansion in money supply which generates inflationary situation in

economy.

Two measures can be adopted to reduce fiscal deficit:

1. reduce public expenditure.

Reduction in expenditure on major subsidies such as food ,fertilizers,export

reduction in expenditure on LTC , bonus .

Retirement of public debt quickly will reduce burden of interest payments in

future.

public sector enterprises should be asked to raise funds from markets and

banks.

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Measures to reduce Fiscal deficit(cont)

2. Increase revenue from taxation.

Tax rate should be broadened by taxing agricultural incomes and incomes

derived from unorganised industrial and service sectors.

Black money has to be mopped upand also tax evasion that occurs every

year has to be prevented by strict enforcement of tax laws.

More commodities should be brought within the tax net.

Effective policy instruments has to be considered to serve the social

objectives instead of giving tax concessions.

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Calculation

Therefore, ift is a timeframe,

Gt is government spending and Tt is tax revenue for the

respective timeframe,

then the primary deficit is: Tt - Gt

IfDt 1 is last year's debt, and r is the interest rate,

This year's total deficit is: Gt

+(1+r)Dt 1

-Tt

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Trend

India's interim budget envisages a large increase in central

government spending, making the central deficit rise to 6 per

cent of GDP in 2008-09 and 5.5 per cent in the next fiscal

2009-10.

But, however the strong capital trends show the increase in

GDP and the estimates show that fiscal deficit in coming

years would decrease and would be around 4.3 % for year2011.

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Current Figures.

Fiscal deficit pegged at 6.9% in 2009-10 as against

7.8% in the previous fiscal i.e., 2008-09.

Government's net borrowing to be 3,45,010 crore for

2010-11.

Finance minister Pranab Mukherjee today presented a

budget with a fiscal deficit of5.5% of the gross domestic

product (GDP).

He pegged the total expenditure at Rs11.09 lakh crore

while the total tax and non-tax revenue was estimated at

Rs6.82 lakh crore for the year2010-11.

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Current figures ( cont.)

To meet the shortfall, the government has estimated

borrowing ofRs3.81 lakh crore for fiscal

2010-11, lowerthan the current fiscal's Rs4.01 lakh crore.

fiscal deficit of7.8% in 2008-09, the comparable fiscal

deficit is 6.9% as per the revised estimates for2009-10.

The rolling targets for the fiscal deficit are pegged at

4.8% and 4.1% for2011-12 and 2012-13, respectively

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Part II

Balance of Payments

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Balance of Payments

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Balance of Trade and Balance of Payments

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Composition of International Trade

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BOP is Different from BOT

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Balance of Payment Accounting

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Current Account

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Invisibles, as mentioned earlier, include

primarily

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Capital Account

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Official Reserves Account

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India Balance of Payment current figures

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Source : RBI

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India Balance of Payments - Summery

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Thank You !!!