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Measures to be Followed to Reduce Fiscal

Deficits
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Measures to be Followed to Reduce Fiscal Deficits!

Large fiscal deficit has two bad consequences. First, it leads to excessive Government
borrowing from the market which causes rise in market interest rate. Higher market
interest rate tends to reduce private investment. Further, it reduces the resources
available for private sector investment.

Second, the extent to which a large fiscal deficit is financed by borrowing from the
Reserve Bank of India which issues new currency (which is called reserve money or
high-powered money) for the government. This causes greater expansion in money
supply through the process of money multiplier and generates inflationary situation in
the economy. Thus, to check the rate of inflation, fiscal deficit has to be reduced
through both raising revenue of the government and reducing government
expenditure.

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In the Indian context, the following measures can be adopted to reduce fiscal deficit
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and thereby to reduce inflationary pressures in the economy. We first spell out the Privacy - Terms
measures which may be adopted to reduce government expenditure and then describe
measures for raising Government revenue.

Measures to Reduce Public Expenditure:

In the context of the Indian economy, the following measures can be adopted to reduce
public expenditure for reducing fiscal deficit and thereby check inflation.

1. A drastic reduction in expenditure on major subsidies such as food, fertilisers,

exports, electricity to curtail public expenditure. A huge sum of money equal to Rs.
20,000 crores are spent on major subsidies on food, fertilisers, export promotion by
the central government. Without a drastic cut in subsidies over time it is difficult to
reduce public expenditure to an appreciable degree.

2. Die huge sum of money is spent by the government on LTC (Leave Travelling
Concessions), bonus, leave encashment etc. A reduction in expenditure on these is
desirable if the government is determined to cut public expenditure.

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3. Another useful measure to cut public expenditure is to reduce interest payments on

past debt. In India, interest payments account for about 40 per cent of expenditure on
revenue account of the central government. In our view, funds raised through
disinvestment in the public sector should be used to retire a part of old public debt
rather than financing current expenditure. Retirement of public debt quickly will
reduce burden of interest payments in future. The prices for dental implants in Tamil Nadu might
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4. Budgetary support to public sector enterprises other than infrastructure projects
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should be substantially reduced. Further, public sector enterprises should be asked to Privacy - Terms
raise funds from the market and banks.

5. Austerity measures should be adopted to curtail unnecessary expenditure in all

government departments.

Increasing Revenue from Taxation:

To reduce fiscal deficit and thereby check rise in inflation rate, apart from reducing
government expenditure, government revenue has to be raised.

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We spell out some measures to increase government revenue:

1. As regards mobilising resources to increase public revenue, it may be noted that the
policy of moderate taxes with simplified taxation structure should be followed. This will
help to increase public revenue rather than reduce it. High marginal rates of taxes
should be avoided as they serve as disincentives to work more, save more and invest
more. Further, high marginal rates of direct taxes cause evasion of taxes.

2. In India, the tax base is narrow for both direct and indirect taxes’, only about 2 per
cent of population pays income tax. To increase revenue from taxation, tax base should
be broadened by taxing agricultural incomes and incomes derived from unorganised
industrial and services sectors. The various exemptions and deductions provided in the
income and wealth taxes should be withdrawn to broaden the tax base and collect more
revenue. It may be noted that the Indian experience of the last 50 years reveals that
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these exemptions and deductions do not promote the intended
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3. As is well known, there is a huge amount of black money in the Indian economy
which has come into existence as a result of tax evasion. In the last VDIS (Voluntary
Disclosure Income Scheme) in 1997-98, more than, 10,000 crores of rupees were
collected. However, a much larger amount of black money still exists in the economy.
Not only the current black money has to be mopped up but also tax evasion that occurs
every year has to be prevented by strict enforcement of the tax laws.

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4. To mobilise more resources through indirect taxes, more commodities should be

brought within the tax net.

5. The past experience has shown that various tax concessions which have been given in
income taxes and indirect taxes for promoting employment, industrial development of
backward regions and for other such social objectives do not actually serve the intended
purposes and are largely used for evading taxes. These concessions should therefore be
withdrawn to collect more revenue from taxes and the social objectives should be
served by adopting more effective policy instruments.

6. Lastly, there should be restructuring of public sector enterprises so that they should
make some surpluses at least for their own development so that their dependence on
government’s budgetary resources should be dispensed with. For this purpose, their
pricing policy should be such that it recovers at least user cost.

To sum up, with the adoption of above measures of reducing public expenditure and
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enhancing public revenue, it will be possible to surprise
reduce you
fiscal deficit to a safe limit. The
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reduction in fiscal deficit will prevent the emergence of excess demand in the economy
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and thereby help in controlling inflation and achieving price stability. Privacy - Terms