According to figures provided by the Controller General of Accounts (CGA) on Friday, the government’s fiscal deficit at the end of June was Rs 2.74 trillion, or 18.2 percent of the full year’s budget forecast.
After a drop in tax receipts owing to pandemic lockdown, which led to the worst recession in seven decades, the fiscal deficit at the end of June 2020 was 83.2 percent of the Budget Estimates (BE) for 2020-21, at Rs. 6.62 trillion. At the end of June, the fiscal deficit stood at Rs. 2,74,245 crore in absolute terms.
The government projects a budget deficit of 6.8% of GDP, or Rs. 15,06,812 crore, for the current fiscal year. The fiscal deficit, or the difference between expenditure and revenue, for 2020-21 was 9.3% of GDP, which was lower than the 9.5 percent forecast in the budget’s updated estimates in February.
Further Key Takeaways
According to CGA data, the government got Rs. 5.47 trillion (27.7% of total receipts for BE 2021-22) until June 2021. The total includes tax income of Rs. 4.12 trillion, non-tax revenues of Rs. 1.27 trillion, and non-debt capital receipts of Rs. 7,402 crore. At the end of June 2020, the receipts were 6.8% of BE.
Recovery of loans worth Rs. 3,406 crore and disinvestment earnings totalling Rs. 3,996 crore make up non-debt capital receipts. In addition, the Government of India has contributed Rs. 1,17,524 crore to state governments as part of the devolution of share of taxes until June 2021.
CGA reported at the end of June that the government’s overall spending was Rs. 8.21 lakh crore (23.6 percent of corresponding BE 2021-22). The revenue account accounted for Rs. 7.10 lakh crore, whereas the capital account accounted for Rs. 1.11 lakh crore.
Interest payments accounted for Rs. 1.84 trillion of total revenue spending, while substantial subsidies accounted for around Rs. 1 trillion.
The Economic Impact of the Fiscal Deficit
Various economists neglect the economic consequences of budget deficits. Others say that budget deficits stifle private borrowing, distort capital structures and interest rates, reduce net exports, and result in higher taxes, greater inflation, or both.
Most economists and government consultants preferred balanced budgets or budget surpluses until the early twentieth century. As part of a focused fiscal policy, governments could borrow money and increase spending. The concept that the economy will return to a natural state of balance was rejected by Keynes. Instead, he believed that once an economic slump occurs, the fear and pessimism that it causes among firms and investors tend to become self-fulfilling, leading to a prolonged period of reduced economic activity.
Implications in the Short Term
Even if there is a discussion regarding the long-term macroeconomic impact of fiscal deficits, there is far less debate over the immediate, short-term consequences. These implications, however, are dependent on the type of deficiency.
If the deficit emerges as a result of the government’s extra spending programs, such as infrastructure expenditure or business grants, the sectors chosen to receive the funds get a short-term boost in operations and profitability. If the deficit occurs as a result of lower government receipts, whether as a result of taxation or a drop in organisational work, no such pump is required.
Funding a Deficit
All shortfalls must be covered. This is done at first by selling government securities such as Treasury bills. Firms and other authorities purchase Treasury bills and lend money to the government in exchange for a promise of payment in the future. The first and most obvious effect of government borrowing is that it limits the amount of money available to lend to or invest in other firms.
Furthermore, interest rates are directly affected by the selling of government assets to finance the deficit. Because government bonds are regarded as exceptionally secure investments, the interest rates paid on government loans are risk-free investments that practically all other financial products must compete with. Other sorts of financial assets must offer a high enough rate to tempt buyers away from government bonds if government bonds yield 2% interest. When the Federal Reserve engages in open market operations to alter interest rates within the bounds of monetary policy, this function is used.