One of the main topics that economists often wrestle with, is the need to and importance of, reducing a country’s fiscal deficit.
Let us try to understand first, what is a fiscal deficit exactly?
In simple terms, the fiscal deficit is the difference between what a government earns (revenue) and what it spends (expenditure).
Why does it need to be reduced?
As this shortfall is made up by the government borrowing, either from domestic or foreign creditors, the fiscal deficit represents an ongoing liability that has to be serviced eventually with interest.
Worldwide, most governments run fiscal deficits, whether developed nations or otherwise, and India is no exception. From the long-term perspective, however, a sustained deficit is not considered healthy, and at a shade under 4% (3.96%), India’s fiscal deficit for FY 2017 was rather higher than the projected 3.5%.
Let us look at some of the ways the present government, with the assistance of an unprecedented electoral mandate, can take steps to reduce this deficit:
Tax reform
Though India is already a highly-taxed country if you look at the rates, in reality evasions and loopholes, as well as the absence of tax on agriculture, means that the tax base is actually very small. One of the main reasons for the FY 2017 deficit target not being met was in fact the shortfall in tax collections. Measures to increase tax compliance and widen the tax base must be undertaken if a serious effort is to be made to reduce the fiscal deficit. Introduction of the GST is a step in the right direction, and needs to be combined with efforts to ensure compliance.
Improve the operational efficiency of public sector enterprises
As we all know, the PSE’s are capitalised by and run on, Government money. When a PSE generates a profit, it shows on the revenue side of the budget, and when it eats up money without showing anything in return, it contributes to the deficit. While a debate about whether the Government needs to be operate in as many sectors as we have PSEs in can rage on, the need of the hour is to try and get every Indian PSE to start contributing to the country by improving their operational efficiency and showing a profit.
Governmental austerity
One of the biggest drains on Government is running itself. From palatial properties in Delhi to subsidized meals, housing, travel and staff, the MPs and ministers of our country are a privileged lot, and that extends all the way down to the lowliest municipal functionary. At some stage, if the Government is serious about expecting the citizenry to pay more taxes and give up their subsidies, it needs to reduce the amount of money it spends on itself.
Reducing subsidies
The Government in India subsidizes a vast range of things, including LPG, food-grains, fertiliser and so on. In FY 2017, India’s subsidy bill was 2.4 lakh crore, which is about 40% of the total fiscal deficit. It may be impossible to reduce this to NIL overnight, and indeed, that should not be done, but measures to reduce dependence of the people on the subsidies can well be taken.
Re-finance old debt
Over a period of time, the interest burden of past debts has piled up, amounting to about 40% of revenue expenditure of the government. Capital incomes, such as money earned from disinvestment should be applied first and foremost to reduce old debt.
Encourage Economic Growth
Perhaps the most obvious measure of all is to create an environment that sustains continued economic growth. A fast-growing economy (based on real numbers rather than the rather egregiously unrealistic ones that government statisticians are throwing up recently) automatically generates buoyant tax collections and becomes less dependent on welfare.
If all these measures are followed in a corruption-free environment, no doubt real progress towards reducing the fiscal deficit will follow. And while some of these measures, particularly related to reduction of subsidies and broadening the tax base are politically risky, if the boldest and most nationalistic government in India’s history will not undertake to take a political risk, then who will?
