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Gs Paper-3
Syllabus: Government Budgeting
Context:
RBI in its ‘Monthly Economic Review’ report highlighted two key areas of concern for the Indian economy: the fiscal deficit and the current account deficit (or CAD).
What does the report say?
- On Fiscal deficit: Fiscal deficit may be high due to cuts in excise duties on diesel and petrol.
- On Current account deficit
- Higher import bills may increase CAD: Costlier imports such as crude oil and other commodities will not only widen the CAD but also depreciate the rupee.
- A weaker rupee will, in turn, make future imports costlier.
- Pulling out of funds from emerging markets: Rupee can also weaken if, in response to higher interest rates in the western economies especially the US, foreign portfolio investors (FPI) continue to pull out money from the Indian markets, which too will hurt the rupee and further increase CAD.
- Higher import bills may increase CAD: Costlier imports such as crude oil and other commodities will not only widen the CAD but also depreciate the rupee.
Impact of twin deficit:
Although no cause of worry in the short term, the twin deficit may in the long-term reduce the savings, depreciate the rupee and imbalance the financial investments of the government for social purposes
What needs to be done:
- Trim revenue expenditure (or the money government spends just to meet its daily needs)
- Rationalizing non-Capex (capital) expenditure to avoid fiscal slippages
- Use tight monetary policy to achieve fiscal consolidation
- Import cut of non-essential goods and make exports of Indian goods competitive
- Reforming the Indian market to make it attractive for FDI and FIIs.
Important Terms
Definition of Fiscal deficit: The fiscal deficit is essentially the amount of money that the government has to borrow in any year to fill the gap between its expenditures and revenues.
- Higher levels of fiscal deficit typically imply the government takes money from the market, thus leaving less money for private sector for its own investment needs (also called crowding out effect)
CAD
It has two parts:
- Trade account (Import and Export of goods): If a country imports more goods than it exports, it is said to have a trade account deficit.
- Invisible account (Import and export of services)
If the net effect of a trade account and the invisibles account is a deficit, then it is called a current account deficit or CAD. A widening CAD tends to weaken the domestic currency because a CAD implies more dollars (or foreign currencies) are being demanded than rupees.
A deficit implies that more money is going out of the country than coming in via the trade of physical goods. Similarly, the same country could be earning a surplus on the invisibles account — that is, it could be exporting more services than importing.
Definition of Capex: Capex or capital expenditure essentially refers to money spent towards creating productive assets such as roads, buildings, ports etc. Capex has a much bigger multiplier effect on the overall GDP growth than revenue expenditure.
Definition of Stagflation: Stagflation is defined as an economy that is suffering both an increase in inflation and low growth.
Stagflation was initially identified in the 1970s, when an oil shock caused fast inflation and significant unemployment in many industrialised economies.
The latest RBI report also point out that “even as the world was looking at a distinct possibility of widespread stagflation, India was at low risk due to its stabilisation policies.”
Insta Links
Practice Questions:
Q. Which one of the following is likely to be the most inflationary in its effects? (UPSC CSE 2021)
- Repayment of Public debt.
- Borrowing from the public to finance a budget deficit.
- Borrowing from the banks to finance a budget deficit.
- Creation of new money to finance a budget deficit.
Answer: d
Q. There has been a persistent deficit budget year after year. Which action/actions of the following can be taken by the Government to reduce the deficit? (UPSC CSE 2016)
- Reducing revenue expenditure
- Introducing new welfare schemes
- Rationalizing subsidies
- Reducing import duty
Select the correct answer using the code given below.
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2, 3 and 4
Answer: C
Q. What is twin deficit? Examine as to how India can avoid the twin deficit problem amidst rising commodity prices and subsidy burden.
Q. What is Fiscal Deficit? What are the impacts of Fiscal Deficit on the economy? What are the ways to finance the fiscal deficit? Suggest steps for fiscal consolidation in the light of the Union Budget proposals (15M)
Source: Indian Express, Business Standard
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