Fiscal Crisis In India - Indicators, Causes and Consequences

What is Fiscal Crisis ?

The fiscal imbalance takes place when the government expenditure exceeds government revenue. This fiscal imbalance is also refered as the fiscal crisis.

In 1980, the growing burden of non-development expenditure caused deterioration in the fiscal situation of India. Later this resulted in a fiscal crisis at the beginning of 1991-1992.

Indicators of Fiscal Crisis ↓

The main indicators of fiscal crisis are various deficits such as :-

1. Revenue Deficit (RD) : It is the difference between revenue receipts (income) and revenue expenditure.
2. Budgetary Deficit (BD) : It is the difference between total expenditure and total receipts. Here, both revenue and capital expenditure and receipts are considered.
3. Fiscal Deficit (FD) : It is the excess of total expenditure over revenue receipts and grants. In other words, fiscal deficit is the budget deficit plus government borrowings and other liabilities.
4. Primary Deficit (PD) : It is the fiscal deficit minus interest payments.

From the above table, it is clear that fiscal deficit is about 4.1% of GDP. Overall the revenue deficit has declined from 3.3% in 1990-91 to 2.7% of GDP in 2005-06.

Causes of Fiscal Crisis ↓

The main factors responsible for the fiscal crisis in India are as follows :-

1. Increase in Subsidies

The government has been providing subsidies on a number of items such as fertilizers, exports, food items, etc. This has resulted in a fiscal imbalance. The major subsidies provided by the Central Government of India has increased over the years resulting in fiscal imbalance.

The increase in subsidies by the central government is given in data below :-

2. Payment of Interest

One of the major components of government expenditure is the interest payment both on domestic loans and foreign loans. The government debt has increased considerably over the years. This has resulted in increased interest burden on the government.

Interest payment of the Central Government increased from Rs. 21,500 crores in 1990-91 to Rs. 1,39,823 crores in 2006-07.

3. Defence Expenditure

The defence expenditure is increasing over the years. The government has limited scope to reduce defence budget due to security problems across the Indian borders. The defence expenditure on the part of central government has increased from Rs. 10,874 crores in 1990-91 to Rs. 51,542 crores in 2006-07.

4. Poor Performance of Public Sector

The poor performance of public sector has also resulted in fiscal imbalance. The poor performance of public sector is due to various reasons such as political interference, inefficiency and corruption of management, low labour efficiency, lack of professionalism, surplus staff, etc.

Due to poor performance of public sector, the Government gets low revenue by way of dividend from public sector units.

5. Excessive Government borrowings

The internal and external debt of the government has increased considerably during the past few decades. Due to the debts; the government has to incur high expenditure in form of interest payments.

6. Tax Evasion

Indian tax system is made up of complex procedures with numerous exemptions. Corruptions is rampant at all levels, which leads to the fiscal imbalance.

7. Weak Revenue Mobilisation

While increase in government expenditure has been the major cause of fiscal imbalance, inadequate rise in revenue receipts also contributed to fiscal imbalance. The revenue receipts of the centre, consisting of tax revenue, net of state's share and non-tax revenue, has increased at slower rate than that of growth in expenditure.

8. Huge Borrowings

The gap between expenditure and revenue is financed through loans, both internal and external. The borrowings have been spent on unproductive purposes as well. The huge borrowings resulted in large interest payments.

9. Other Causes

Unproductive expenditure by the government, Weak resource mobilisation and Low Capital Formation.

Consequences of Fiscal Crisis ↓

The fiscal imbalance has resulted in harmful consequences like mounting inflation, deficit in balance of payment, etc. It has also adversely affected the growth of economy. The government must introduce major fiscal correction policies to overcome the fiscal crisis.

The consequences of fiscal crisis i.e. a sustained high fiscal deficits over 20 years are as follows :-

1. Debt Trap

With increasing levels of borrowing for financing activities, which have zero or low yields, interest payments increase at faster rate. Thus, non-productive expenditures rise, give rise to higher and higher revenue deficits.

2. Cut in Capital Expenditure

Because of debt service payments forming a higher proportion of expenditures, all other activities of the government suffer. The main sufferer in this process is government capital expenditure in both economic and social infrastructure.

3. No Increase in Expendture on Education and Health

High debt service payments also prevents increase in or even maintenance of real expenditure on social services, i.e. on education and public health.

4. High Interest Rates

The continued high level of public borrowings has an effect on the rest of the economy through prevalence of high interest rates.

5. Slow Economic Growth

The fiscal imbalance affects economic growth in the country. Fiscal imbalance first affects capital formation which in turn affects the economic growth.

6. Other Consequences

Some other consequences of fiscal crisis are :-

1. Fiscal imbalance may also lead to inflation in the economy.
2. High fiscal deficit may discourage foreign investment in the country.
3. The government has to borrow additional funds to solve fiscal deficit, which put extra burden on the government for payment of interest. It further worsens the fiscal imbalance.

Conclusion On Fiscal Crisis ↓

The fiscal imbalance however still continue as the Government has failed to reduce its own expenditure. The extravagant expenditure done by politicians and minister continues without any restriction. The populist policy followed by the Government, failure to reduce fertilizer subsidy, and massive burden of interest payment has still not take out the Indian economy from a situation of severe fiscal imbalances.