7/5/2014 Bankers Adda: All about Fiscal Deficit

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All about Fiscal Deficit

Definition of 'Fiscal Deficit: When a government's total expenditures

exceed the revenue that it generates (excluding money from borrowings).

Now let us understand what Revenues and expenditures are :

Every family needs to plan their budget so that they don’t go in to the

deficit trap. In ideal conditions revenues should always exceed the

expenditures.

How revenues are generated:

Tax Revenues: These are those

revenues that are generated

through the taxes levied on public

such as Income Tax, Corporate

Tax, Wealth Tax, Fringe benefit

taxes (these all are direct taxes i.e.

levied on the individual directly),

there are some other taxes which

in turn are sources of govt.

revenues such as, VAT, custom

duty, excise duty, service tax (these are types of indirect taxes).

Grants and aids: India enjoys a special love of nature resulting in floods,

droughts, lovely Tsunamis (lol), cyclones etc etc etc… So India gets

different Grants and Aids from the World banks, ADBs, big boy US, or

anybody who wishes to help.

Fines and Penalties: remember that traffic walle bhaiya, sometimes he

refuses your chai paani k lie lelo help, All those times the income goes in

to govt’s pockets.

Expenditures:

As India is a developing country here Ameer is more Ameer and Gareeb is

more Gareeb concepts follow so Govt. has to spend on the different Rajiv

Gandhis, Mahatma Gandhis and Pradhan mantris

scheme(MNERGA,JNNURAM,PDS schemes etc..).

India is lucky with some peaceful neighbors in the vicinity so India has to

spend a chunk of revenues for Defense (Unplanned expenditure).

FRBM Act(Fiscal Responsibility and Budget Management act):

As per the target, revenue deficit, which is revenue expenditure minus

revenue receipts, have to be reduced to nil in five years beginning 2004-05.

Each year, the government is required to reduce the revenue deficit by

0.5% of the GDP.

How Fiscal Deficit is harmful-

7/5/2014 Bankers Adda: All about Fiscal Deficit

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Debt Trap-Fiscal deficit is a type of Debt trap, It creates a deficit which

can be filled by extra borrowings or increased taxes creating burden on

economy or extra debt

Inflation- The money released by the govt. for different schemes never

reaches to the needy and is transferred to the pockets of middlemen who

can now buy a new merc or chunks of gold which leads to inflation.

Black money- Now the money that is with the bribe masters cannot be in

India because of Income tax officials’ fear so they are transferred to Tax

heavens i.e. so called Swiss Banks, this create a shortfall of Taxes in

India creating a poor Tax collection.

How Fiscal Deficit is not harmful-

Fiscal deficit occurs when govt. spends more in the fiscal year as

compared to the revenues generated in the period, If all that Yojanas

mentioned earlier turnout to be a success will create more employment,

better health of the people, better infrastructure and will eventually leads to

a prosperous economy, that will help to curb the Financial Deficit in the

coming years.