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This article provides information about the different recovery measures planned out by the govt, to counter the inflation, fiscal and the trade deficit:
In the aftermath of the 1991 oil shock that was followed by Kuwait invasion by Iraq were, the immediate tasks at hand – reduce inflation, cut fiscal and trade deficit, increase forex inflows and bring the economy out of depression, especially industrial recession.
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The view amongst the economic managers of Dr. Singh’s team was that the high fiscal deficit was leading to an overheating of the economy – it was increasing the aggregate demand in the economy, causing an increase in prices which was also spilling over to the external account and increasing the trade deficit.
The increased fiscal deficit meant higher borrowing by the government to finance its expenditures. This raised interest rates in the economy, and “crowded out” private investment. A reduction of the fiscal deficit, on the other hand, would have a positive impact – it would bring down the interest rate, reduce the interest burden, have deflationary pressures which would bring down prices and help close the trade gap. Since, one single variable was held responsible for all this it is but obvious that the target of adjustment policy was the reduction of the fiscal deficit.
The three commonly used measures are: Revenue deficit = Revenue expenditures – Revenue receipts; Fiscal deficit = Revenue deficit + Net capital disbursement; and Primary deficit = Fiscal deficit – Disinvestment receipts – Gross Interest payments. Prior to the economic reforms, the most common measure of the government’s balance was the “budget deficit”. However, this was found to be too narrow a measure of the government’s overspend and therefore the fiscal deficit was adopted as the standard measure of the government’s over-spend. There are two related questions that come up here – this single-minded effort to reduce fiscal deficit, (a) is it justifiable and (b) has it yielded results?
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The neo-liberal economic doctrine described above that was propagated by the World Bank and IMF linked all ills of the economy to the rise in fiscal deficit. However, Rakshit found that the empirical evidence in support of the structural adjustment programme was weak rate of inflation and the export-import gap had little to do with the level of fiscal deficit calling into question the very justifiability of the structural adjustment programme. Ghosh felt what was required to stabilise the economy was not further trade liberalisation but agrarian change, since the bulk of the Indian population was dependent on this sector.
In the first two years of the reform programme, the Centre introduced severe budgetary cuts, which were directed at reducing subsidies, social sector spending and capital expenditures. As a consequence of this, revenue deficit as well as the fiscal deficit declined briefly. But by the mid 90s, these returned to the pre reform level. In fact, the revenue deficit persistently exceeded the 1990-91 figures by 1998-99. The share of the revenue deficit in the fiscal deficit grew from below 50% to 78%. This means that excess government spending was not for asset creation but for consumption purposes.
However, a closer look at the data tells another story. The Centre’s deficits are only a part of the overall deficit of the Centre and states combined. So, despite the fairly robust growth of the economy, and the wide-ranging fiscal changes that have been undertaken, we continue to have a government that invests too little and consumes too much. Further, the Centre very quietly is passing on its fiscal responsibilities to the states so while the Centre seems to be improving its fiscal performance, it is the states which have to suffer the fiscal burden of reform.
The major problem large debts and deficits pose for any government is the burden of servicing the debt. In fact, the central government has an interest liability amounting to more than 4.5% (as a proportion of GDP). This is a large drain on the government’s limited revenues and squeezes expenditures on other heads.