Fiscal Deficit and Growth
•A higher debt-to-GDP ratio (fiscal deficit) may be acceptable when the economy is
rapidly growing, because with its future earnings it will be able to pay off the debt and
the interest on it.
•The current tax reforms in India include implementing DTC and GST. Expenditure
reforms substantially deals with better targeting of subsidies.
•Different countries are heading for a debt trap (over accumulation of fiscal deficit) so
it is necessary to look at the right combination of debt and growth scenarios to
achieve sustainability and stable development.
•There was a global financial crisis which decreased growth and investment so
government released stimulus packages which increased government expenditure so
even the deficit. It helped to boost growth but could not sustain the growth.
•Their study rejects the hypothesis that high debt causes lower growth
•Fiscal deficit consists of two parts i.e. receipts and expenditure.
•Receipts: taxes are dependent on different sectors of the economy. Capital receipts are
dependent on gross fiscal deficit and private income.
•Expenditure: The general expenditure consists of general administration, interest payments
and pensions. The social includes expenditures on education, health, water, supply and
sanitation, and social security programmes. The economic includes agriculture, industry,
roads, energy, transport etc. Revenue expenditure includes subsides and interest payments.
Capital expenditure is loans and advances.
•To achieve favourable growth rate, government should do heavy investment which will
increase the government expenditure. That may lead to high fiscal deficit but the government
expenditure should be more on social and economic services and capital expenditure rather
than on interest payment, salaries and subsidies. This will lead to higher growth in long run
and increases even the revenues from taxes which will reduce the deficit and increase the
growth in the long run.
•Currently we need to relook at our policies and take necessary action so that we could achieve
the targets which will lead us to inclusive growth.
