PPT On Fiscal Consolidation
In India
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Fiscal Consolidation In India Presentation Transcript:
1. Fiscal Consolidation????
Fiscal- financial matter related to government
Consolidation- the act of combining multiple things into an integral whole
Fiscal Consolidation- a set of measures designed to reduce government deficits and the accumulation of debts
2. Revenue Deficit: When the net amount received (revenues less expenditures) falls short of the projected net amount to be received.
RD = RR (Revenue receipt) –RE (Revenue expenditure)
Budgetary Deficit (BD) : Budget deficit is also known as the "national debt." BD = TR-TE
Fiscal Deficit (FD) : When a government's total expenditures exceed the revenue after including borrowing also. FD = TR- Borrowing- TE
Primary Deficit (PD) : The deficit which is derived after deducting the interest payments component from the total deficit of any budget.
PD = FD- i
Current Account Deficit (CAD): imports more than exports.
3.
Success story of Fiscal Consolidation in India
Objectives of FRBM Act 2003
The main objectives of FRBM Bill / Act are :-
To reduce fiscal deficit
To adopt prudent debt management
To generate revenue surplus
4. The fiscal improvement from financial year 2002-03 to 2007-08 saw a rise in foreign reserves providing unprecedented import cover and global confidence.
Under this act the revenue deficit and fiscal deficit of the government may exceed the targets only on the grounds of national security or national calamity faced by the country.
The central government should ensure that the total liabilities (including external debt at current exchange rate) should not exceed 9% of GDP for the financial year 2004-2005.
5. The central government shall not normally borrow from the R.B.I.
Fiscal Transparency.
The aggregate disbursements of the central and state government showed an increase in capital outlays from 11.87 per cent in 2002-03 to 18.59 per cent 2007-08 (as percentage of aggregate disbursements).
6. Budget 2012-13
Introduction of amendments to the FRBM Act as part of Finance Bill, 2012.
Concept of “Effective Revenue Deficit” and “Medium Term Expenditure Framework” statement are two important features of amendment to FRBM Act in the direction of expenditure reforms.
Effective Revenue Deficit is the difference between revenue deficit and grants for creation of capital assets. This will help in reducing consumptive component of revenue deficit and create space for increased capital spending.
Recommendations of the Expert Committees to reduce the number of centrally sponsored schemes and to address plan and non-plan classification to be kept in view while implementing Twelfth Plan.
Central Plan Scheme Monitoring System to be expanded for better tracking and utilization of funds.
7. Need of fiscal consolidation?????
India is suffering from a serious CAD which appears to be because of the twin problems of low savings, caused by reckless fiscal policy, and evidence of falling export competitiveness.
India’s exports seem more diversified than China’s, though the degree of diversification has fallen somewhat in the last few years.
While India has been able to maintain its comparative advantage in tea, coffee, spices and marine products, it has lost comparative advantage in export of some agricultural commodities to other Asian competitors during the period after economic reforms.
Tea has suffered one of the sharpest falls in RCA since 2000, with Sri Lanka increasingly dominant. The RCA of coffee has also fallen sharply from 3.5 in 2000 to 1.3 in 2012. In coffee exports, Indonesia, Thailand and Vietnam are the major competitors to India.
8. “The Reserve Bank’s own research shows the economy can sustain a CAD of about 2.5 per cent of GDP under a scenario of slower growth,” (Deepak Mohanty, executive director, RBI).
The Fiscal Deficit of around 6.1 per cent which is far higher than the budget estimate of 5.1 per cent of GDP suggests in 2012-13.
There is a also need to reduce imports and boost merchandise exports to bring the CAD to sustainable levels.
High deficits have an adverse impact on India’s growth. Runaway fiscal deficits, leading to unsustainable level of public debt, can cause diverse forms of macroeconomic imbalances varying with means through which the deficit is financed.
9. The CAD was already high at 4.2 per cent of GDP in 2011-12 and could deteriorate further. This will further weaken the rupee and negatively impact the capital markets and the banking sector.
The growing fiscal deficit also leaves limited monetary space for lowering interest rates to stimulate private investment and growth.
The recent increase in government deficits, the investment decline (due to tight monetary policy), the rigidity of inflation, the pronounced IIP (index of industrial production) ( industrial output in September contracted by 0.4% due to dismal show by manufacturing sector and decline in consumer as well as capital goods output, Ahluwalia )decline and the widening of the CAD are all pointers to a deepening fiscal crisis.
Besides this, the need for fiscal consolidation is the financial health of the Oil Marketing Companies (OMCs)(OMCs were currently losing Rs 17.05 on a litre of diesel, Rs 32.70 on a litre of kerosene and Rs 347 on a cylinder of cooking LPG and that their losses on these three fuels could touch Rs 1.87 lakh crores in the current fiscal)(The Indian Express 11sept2012). The high debt of the OMCs could lead financial crisis.
It is imperative that the government draw up a clear roadmap to reduce fiscal deficits thus fiscal consolidation came into existence.
10. For more please refer our PPT. Thanks.
