Fiscal imbalance, Microeconomics

Fiscal Imbalance:

The persistent rise in resource gap has led to a growing volume of public debt. The central feature that emerges is a serious fiscal imbalance, arising from the inability of the Government to control the growth of revenue expenditure. Taking the long view, revenues have risen from only 8.4 per cent of GDP in 1950-51 to the current 19 to 20 per cent. However, expenditure has grown faster after starting from a larger base. It has risen from 9.5 per cent of GDP in 1950-51 to around 29 per cent at present. Hence, the fiscal balance has remained in deficit throughout and the deficit has grown to over 9 per cent of GDP. The revenue account deficit has, however, arisen only since the mid-eighties, resulting in a progressive crowding out of Government capital expenditure from around that time.  

The overall deficit has led to a number of adverse effects on both short-term macro-economic outcomes as well as the longer-term growth prospects of the Indian economy. Financing a large and growing deficit has resulted in the accumulation of a huge public debt. The public debt - GDP ratio has risen from under 30 per cent in 1981-82 to over 75 per cent at present, and there are serious concerns now regarding the sustainability of the debt. The interest on public debt is now the fastest growing component of revenue expenditure, which, in turn, is the principal component of total expenditure responsible for driving up the deficit. Financing the deficit requires fresh borrowing, which expands the stock of debt. This leads to further increase in the expenditure on interest payments, further expanding the deficit. 

A major weakness of Government finances has been the inability to curtail revenue expenditures.  The structural character acquired by revenue imbalances during the 1990s has been a critical factor underlying the rigidity of fiscal imbalances and explains as to why fiscal correction has not been durable during the 1990s. Thus, the combined fiscal deficit at the end of the decade was the same as at the beginning at around nine per cent of the GDP.

Posted Date: 11/15/2012 1:56:23 AM | Location : United States

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