Fiscal Deficit and Balance of

Payments

By:
Akshaya
(1020734)
Amala Gadde
(1020735)
B. Madhulika
(1020737
Mahija Reddy
(1020758)
 Part – I
Fiscal Deficit
Fiscal Deficit

•A deficit is the amount by which a sum of money falls

short of the required amount.

•A government's deficit can be measured with or without

including the interest it pays on its debt.

•Fiscal deficit is the excess of total expenditure(both

revenue and capital a/c) over revenue receipts and only
non-debt type of capital receipts such as recoveries of
loans.

• The primary deficit is defined as the difference between

current government spending and total current revenue
from all types of taxes.
Primary deficit = fiscal deficit – interest payments
Financing for fiscal deficit

•Fiscal deficit can be financed in two ways:

 Borrowing by the government from the market, both

inside and outside the country.
On this borrowing , the Govt has to pay rate of interest
annually.
Apart it has to pay back the internal and external debt
taken.
 Borrowing from the RBI which issues new notes
against Govt securities, which is popularly called as
DEFICIT FINANCING.
Implications of fiscal deficit

• Borrowing from within and outside the country leads to increase in

PUBLIC DEBT and its burden.

•Support through deficit financing leads to creation of new money and rise
in prices or INFLATION.

To check inflation and achieve price stability, world bank have
recommended that fiscal deficit in India should be reduced to 3% of GDP.
To reduce fiscal deficit to 3% requires drastic cut in non-productive
revenue expenditure.

•Large deficits adversely affects Economic Growth.

Due to large revenue deficit, a very large part of borrow funds by the
Govt is used to finance current consumption expenditure of the Govt.
As a result , a smaller part of resources are left for productive
investment in infra strucutre and social capital by the Govt, which lowers
the rate of economic growth.
•More borrowing by the Govt leaves less resources for private sector
Measures to reduce Fiscal deficit

•Large fiscal deficit has two bad cosequences

Excessive Govt borrowing from market causes rise in market interest rate
which tends to reduce private investment. Further it reduces the resources
available for private sector investment.
Greater expansion in money supply which generates inflationary situation in
economy.

•Two measures can be adopted to reduce fiscal deficit:

1. reduce public expenditure.

 Reduction in expenditure on major subsidies such as food ,fertilizers,export
 reduction in expenditure on LTC , bonus .
 Retirement of public debt quickly will reduce burden of interest payments in
future.
 public sector enterprises should be asked to raise funds from markets and
banks.
Measures to reduce Fiscal deficit(cont…)

2. Increase revenue from taxation.

 Tax rate should be broadened by taxing agricultural incomes and incomes

derived from unorganised industrial and service sectors.

 Black money has to be mopped upand also tax evasion that occurs every
year has to be prevented by strict enforcement of tax laws.

 More commodities should be brought within the tax net.

 Effective policy instruments has to be considered to serve the social

objectives instead of giving tax concessions.
Calculation

Therefore, if t is a timeframe,
Gt is government spending and Tt is tax revenue for the
respective timeframe,

then the primary deficit is: Tt - Gt

If Dt − 1 is last year's debt, and r is the interest rate,

This year's total deficit is: Gt +(1+r)Dt − 1 -Tt

Trend

•India's interim budget envisages a large increase in central

government spending, making the central deficit rise to 6 per
cent of GDP in 2008-09 and 5.5 per cent in the next fiscal
2009-10.

•But, however the strong capital trends show the increase in

GDP and the estimates show that fiscal deficit in coming
years would decrease and would be around 4.3 % for year
2011.
.

Current Figures

 Fiscal deficit pegged at 6.9% in 2009-10 as against

7.8% in the previous fiscal i.e., 2008-09.

 Government's net borrowing to be 3,45,010 crore for

2010-11.

 Finance minister Pranab Mukherjee today presented a

budget with a fiscal deficit of 5.5% of the gross domestic
product (GDP).

 He pegged the total expenditure at Rs11.09 lakh crore

while the total tax and non-tax revenue was estimated at
Rs6.82 lakh crore for the year 2010-11.
Current figures ( cont….)

To meet the shortfall, the government has estimated

borrowing of Rs3.81 lakh crore for fiscal 2010-11, lower
than the current fiscal's Rs4.01 lakh crore.

fiscal deficit of 7.8% in 2008-09, the comparable fiscal

deficit is 6.9% as per the revised estimates for 2009-10.

The rolling targets for the fiscal deficit are pegged at

4.8% and 4.1% for 2011-12 and 2012-13, respectively
 Part – II
Balance of Payments
Balance of Payments
Balance of Trade and Balance of Payments
Composition of International Trade
BOP is Different from BOT
Balance of Payment Accounting
Current Account
Invisibles, as mentioned earlier, include
primarily
Capital Account
Official Reserves Account
India Balance of Payment current figures
Source : RBI
India Balance of Payments - Summery
Thank You !!!