A government contrary to an
individual first decides its expenditure and then the sources of revenue and income,
whereas an individual decides his expenditure according to his income. This is,
probably, true for almost all the government in all the countries of the world
except the United States
which can print platinum coins worth $ 1 trillion and deposit them at the
Federal Reserve (US’
Central Bank) and can get $ 1 trillion in the normal currency, to cover deficit
and debt. This makes the US’
debt safer than other countries. Public debt in own currency reduces the risk
of default. The central or reserve banks act as the bank of the government and
fix the percentage of deposits of banks to be invested in the government bonds
and securities. In INDIA
it is called Selective-Liquidity-Ratio (SLR) and is held at 23 %. However, due
to high fiscal-deficit and inflation the reserve bank is considering lowering
SLR which will also keep control on the finances of the new government. The
government also regularly issues, sell, government bonds and securities to
bridge the gap between revenue and expenditure with the help of the reserve bank.
Even though, the previous
government in INDIA succeeded in keeping the economy afloat during recession in
the US in 2008 through fiscal and monetary stimuli but it bloated government
finances and built demand pressure in the economy and resulted in high
inflation as high as 20%. However, later our Finance Minister exuded that the
stimuli provided to ward-off recession during 2008 has not been rolled-back
till 2013 which created demand-pressures in the economy and pushed inflation
higher. Looking at the high fiscal deficit, he said that given high inflation
we need to curb fiscal spending, and, prepared a complete road-map to bring
inflation and fiscal-deficit down, and proposed to create a reserve or spare
capacity in the years to come. The high fiscal deficit following the recession
and the government commitment to bring it down will constrain the finances of
the new government at the center and will leave less room for fiscal-spending
to give the economy a boost in the face of falling growth-rate.
The gross fiscal deficit of
the Central Government in budget estimates (BE) 2013-14 (FY14) was placed at 4.8
per cent of GDP as against 5.2 per cent of GDP in the revised estimates (RE)
for 2012-13. The gross and net market borrowing requirements of the Government
in FY14BE were placed at `5,79,000 crore and `4,84,000 crore, respectively,
which were reduced in revised estimates (RE), as per interim Budget for
2014-15, to `5,63,911 crore and `4,53,902 crore in view of the gains made in
fiscal consolidation by the Government. The key deficit indicators of the
Central Government as percentage of budget estimate (BE) showed pressure in
fiscal outcome for the new government vis-a-vis their position during the same
period of the previous fiscal year. Lower tax collections coupled with a rise
in expenditure accounted for the increase in deficit indicators during the
period under review. Gross tax collections during the period, shows a growth of
9.2 per cent against a budgeted growth of 19.1 per cent. Collections from
corporation tax, projected to grow at 16.9 per cent showing a growth of 9.6 per
cent over the previous fiscal year. Personal income tax collections showed a
growth rate of 19.8 per cent against 20.2 per cent projected in BE for FY14.
Among the major indirect taxes, collections from customs duties showed a
moderate growth of 4.3 per cent during April-December 2013 (BE 13.6 per cent),
while growth in excise duties was negative at (-)6.9 per cent (BE 14.9 per
cent). Service tax collections increased by 19.8 per cent during the period
under discussion against 35.8 per cent in the BE. Total expenditure during
April-December 2013 at 69.9 per cent of BE was higher than 66.5 per cent during
the same period of previous year. As a result of lower tax collections and
increased expenditure, revenue deficit and fiscal deficit during April-December
2013 at 97.7 per cent and 95.2 per cent of BE were higher than 85.1 per cent
and 78.8 per cent, respectively, during the same period a year ago. Primary
deficit at 155.9 per cent of BE was also higher than 104.6 per cent during the
corresponding period of the previous fiscal year.
Therefore as long as fiscal
position of the Indian economy is in question, the new government will find the
fiscal-path troublesome. Falling growth rate too has contributed to lower tax
collections since less income and demand is created in the economy. Economy’s
taxes have a positive correlation with its growth rate and higher growth
generates more income and taxes. Higher growth rate and taxes can only bring us
out of this difficult fiscal position. Only if the economy grows at a higher
rate the problem of negative gap between revenue and expenditure could be dissolved.
Moreover, we hope and expect
from our new government at center that it will make the Treasury of the
Government of INDIA as strong and credible as the United States of America…
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