The meaning of 'deficit' differs from that of 'debt', which is an accumulation of yearly deficits.

Deficits occur when a government's expenditures exceed the revenue that it generates. The deficit can be measured with or without including the interest payments on the debt as expenditures. The primary deficit is defined as the difference between current government spending on goods and services and total current revenue from all types of taxes net of transfer payments. The total deficit (which is often called the fiscal deficit or just the 'deficit') is the primary deficit plus interest payments on the debt.[1] Therefore, if t is a timeframe, Gt is government spending and Tt is tax revenue for the respective timeframe, then the primary deficit is

If Dt 1 is last year's debt, and r is the interest rate, then the total deficit is

Finally, this year's debt can be calculated from last year's debt and this year's total deficit, as follows:

Economic trends can influence the growth or shrinkage of fiscal deficits in several ways. Increased levels of economic activity generally lead to higher tax revenues, while government expenditures often increase during economic downturns because of higher outlays for social insurance programs such as unemployment benefits. Changes in tax rates, tax enforcement policies, levels of social benefits, and other government policy decisions can also have major effects on public debt. For some countries, such as Norway, Russia, and members of the Organization of Petroleum Exporting Countries (OPEC), oil and gas receipts play a major role in public finances. Inflation reduces the real value of accumulated debt. If investors anticipate future inflation, however, they will demand higher interest rates on government debt, making public borrowing more expensive.

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1991 India economic crisis

From Wikipedia, the free encyclopedia

By 1985, India had started having balance of payments problems. By the end of 1990, it was in a serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had reduced to such a point that India could barely finance three weeks worth of imports. India had to airlift its gold reserves to pledge it with IMF for a loan.[1]
Contents
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1 Causes and consequences 2 Recovery 3 Aftermath 4 See also 5 References

[edit]Causes

and consequences

The crisis was caused by currency Overvaluation as well as Current account deficit and investor confidence played significant role in the sharp exchange rate depreciation.[2] In mid-1991, India's exchange rate was subjected to a severe adjustment. This event began with a slide in the value of the Indian rupeeleading up to mid-1991. The authorities at the Reserve Bank of India took partial action, defending the currency by expending international reserves and slowing the decline in value.However, in mid-1991 ,with foreign reserves nearly depleted, the Indian government permitted a sharp depreciation that took place in two steps within 3 days (July 1 and July 3, 1991) against major currencies.[3] The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980s. During mid eighties, India started having balance of payments problems. Precipitated by the Gulf War, Indias oil import bill swelled, exports slumped, credit dried up and investors took their money out.[4] Large fiscal deficits, over time, had a spill over effect on the trade deficit culminating in an external payments crisis. By the end of 1990, India was in serious economic trouble.

The gross fiscal deficit of the government (center and states) rose from 9.0 percent of GDP in 1980-81 to 10.4 percent in 1985-86 and to 12.7 percent in 1990-91. For the center alone, the gross fiscal deficit rose from 6.1 percent of GDP in 1980-81 to 8.3 percent in 1985-86 and to 8.4 percent in 1990-91. Since these deficits had to be met by borrowings, the internal debt of the government accumulated rapidly, rising from 35 percent of GDP at the end of 1980-81 to 53 percent of GDP at the end of 1990-91. The foreign exchange reserves had dried up to the point that India could barely finance three weeks worth of imports.
[edit]Recovery

Further information: Economic liberalisation in India With Indias foreign exchange reserves at $1.2 billion in January 1991[5][6][7] and depleted by half by June,[7] barely enough to last for roughly 3 weeks of essential imports,[6][8] India was only weeks way from defaulting on its external balance of payment obligations.[6][7] The caretaker government in India headed by Prime Minister Chandra Sekhar Singh, 's immediate response was to secure an emergency loan of $2.2 billion[9][10] from the International Monetary Fund by pledging 67 tons of India's gold reserves as collateral.[1][10] The Reserve Bank of India had to airlift 47 tons of gold to the Bank of England[4][5] and 20 tons of gold to the Union Bank of Switzerland to raise $600 million.[4][5][11] National sentiments were outraged and there was public outcry when its was learned that the government had pledged the country's entire gold reserves against the loan.[4][8] Interestingly, it was later revealed that the van transporting the gold to the airport broke down on route and panic followed.[1] A chartered plane ferried the precious cargo to London between 21 May and 31 May 1991, jolting the country out of an economic slumber.[4] Chandra Shekhar government had collapsed a few months after having authorized the airlift.[4] The move helped tide over the balance of payment crisis and kick-started Manmohan Singhs economic reform process.[5] P.V. Narasimha Rao took over as Prime Minister in June, the crisis forcing him to rope in Manmohan Singh as Finance Minister, who unshackled what was then called the 'caged tiger'.[4] The Narasimha Rao government ushered in several reforms that are collectively termed as liberalisation in the Indian media. The forex reserves started picking up with the onset of the liberalisation policies and peaked to $314.61 billion at the end of May 2008.[12]

[edit]Aftermath

A program of economic policy reform has since been put in place which has yielded very satisfactory results so far. While a lot still remains on the unfinished reform agenda, the prospects of macro stability and growth are indeed encouraging.
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Post-liberalisation period (since 1991)

Main articles: Economic liberalisation in India and Economic development in India

GDP of India has risen rapidly since 1991

. In the late 1970s, the government led by Morarji Desai eased restrictions on capacity expansion for incumbent companies, removed price controls, reduced corporate taxes and promoted the creation of small scale industries in large numbers. He also raised the income tax levels at one point to a maximum of 97.5%, a record in the world for non-communist economies. However, the subsequent government policy of Fabian socialism hampered the benefits of the economy, leading to high fiscal deficits and a worsening current account. The collapse of the Soviet Union, which was India's major trading partner, and the Gulf War, which caused a spike in oil prices, resulted in a major balance-ofpayments crisis for India, which found itself facing the prospect of defaulting on its loans.[52] India asked for a $1.8 billion bailout loan

from the International Monetary Fund (IMF), which in return demanded reforms.[53] In response, Prime Minister Narasimha Rao, along with his finance minister Manmohan Singh, initiated the economic liberalisation of 1991. The reforms did away with the Licence Raj, reduced tariffs and interest rates and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. [54] Since then, the overall thrust of liberalisation has remained the same, although no government has tried to take on powerful lobbies such as trade unions and farmers, on contentious issues such as reforming labour laws and reducing agricultural subsidies. [55] By the turn of the 20th century, India had progressed towards a free-market economy, with a substantial reduction in state control of the economy and increased financial liberalisation.[56] This has been accompanied by increases in life expectancy, literacy rates and food security, although the beneficiaries have largely been urban residents.[57] While the credit rating of India was hit by its nuclear weapons tests in 1998, it has since been raised to investment level in 2003 by S&P and Moody's.[58] In 2003, Goldman Sachs predicted that India's GDP in current prices would overtake France and Italy by 2020, Germany, UK and Russia by 2025 and Japan by 2035, making it the third largest economy of the world, behind the US and China. India is often seen by most economists as a rising economic superpower and is believed to play a major role in the global economy in the 21st century.[59][60]
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