As the word economics flashes subconsciously our minds start thinking about stock markets, currencies, abstract graphs, economic summits in some developed country capital or a newspaper talking about money, growth, investment and risk. As a matter of fact economics is a social science, though it differs a lot from other social sciences. Economics is defined as "the study of choice under the condition of scarcity" (Hall and Lieberman, 2008). Mankiw, 2008 opines that management of society's resources are important because resources are limited. Therefore society cannot give every individual highest standard of living but to give an individual best management of limited resources is important and this is what economics all about.
Economics can be classified broadly into two categories microeconomics and macroeconomics. This classification was first made by Nobel laureate professor Ragnar Frisch. Under Microeconomics the prima focus is on individual units like consumer, firm, an industry, even a group for example market demand curves (which in turn are aggregates of individual demand curves.)
Boulding described microeconomics as:
"Study of particular firm, particular household, individual price, wage, income, industry and particular commodity".
On the other hand in macroeconomics, economic problems are studied from the point of view of the entire economy like aggregate consumption, aggregate employment and national income
Boulding described macroeconomic as:
"Study of the overall average and aggregate of the system". (Jain and Trehan, 2008)
While studying about economic related problem of any country macroeconomic study is of vital importance.
1.2 Indian Economy- Background
Even before India got independence there was a broad consensus on national level that after getting independence India should follow planned development and the centre should play a dominant role to achieve the planned growth (Srinivasan, 1996). This was followed by creation of several central government owned enterprises and plethora of administrative controls. The administrative rules were extremely tedious and it was hard to come out of the strong administrative system to do any business. This period is also known as licence-quota-permit raj. This policy of centre did not failed completely neither it did any wonders for Indian economy. During the period 1950-80 the growth rate of Indian economy was meagre 3.75%. The ill effect of licence era was not only it stalled growth rate but also it gave support to political corruption (Srinivasan, 1996).
This growth in GDP was not overnight but was due to the efforts being made in trade and industrial liberalization and also tax reforms. In fact it started to become clear from 1970s that cost of state intervention which earlier was considered to be the vehicle for growth of Indian economy were far out of proportion to the benefits. The state intervention not only prevented competition but also constrained efficiency and impeded growth. (Debroy, 2004)
With the start of eighties Indian economic started to change tracks from fiscal conservatism it started to adopt an expansionary policy. The drivers of this change were primarily aids from World Bank and International Monetary Fund and secondarily there were some liberalization in trade and exchange regime (Srinivasan, 1996). As a result of these developments growth plunged to 5.6 %( India statistics handbook, 2010) during this decade, but as mentioned this growth was primarily pillared on foreign aid and debt as a result macroeconomic balances continued to get disturbed throughout the decade.
The starting of the new decade saw the start of serious economic problem for India, the reason could be the debt driven economic growth of the eighties. As a result there were serious macroeconomic imbalances, the economy was in shattered state and it needed leadership, framework and determination and not just the piecemeal economic reforms of the past to bring it out the economic crisis and then to put in fast lane of economic growth. The leadership and determination came in form of then government headed by Prime Minister P. V. Narsimha Rao and finance minister Man Mohan Singh. The governance realized that it would not be enough to take immediate actions which are necessary in the short run to tide over the crisis and return to the pre-crisis policy thereafter, the need was the formation of systemic reforms and rethinking of the pre-crisis policy regime.
1.2.1 Measures taken by government at times of crisis
The government took certain precautionary as well as discretionary steps in order to take control of the current situation and pave way for better economic future. This included the devaluation of Indian national rupee (INR), fiscal deficit were cut and special balance of payments were mobilized from the IMF and the World Bank. It gave the government an opportunity to launch an array of long overdue economic reforms. The list of major reforms undertaken by the government is given below:
Fiscal:
Recommendations of tax reform committee was adopted (TRC, India, 1991)
External Sector:
Custom duties were lowered from pre-existing rates
foreign investment were encouraged by introducing lucrative investment schemes
Emphasis on building foreign reserve
Industry:
Licence era of 1947 to 1990 was brought to an end
Reduction in industries reserved for public sector
Openness to foreign technology
Disinvestment of non performing public sector enterprises
Financial Sector:
Reserve requirements for banks (CRR and SLR) were reduced
Interest rates were gradually relaxed to promote business
Stock exchange board of India was legislatively empowered.
The National Stock Exchange was established
Government control over capital issues was abolished
Public Sector:
Start of Disinvestment programmes
Greater autonomy and accountability for public enterprises was brought into action
As mentioned earlier Indian economy showed growth and development right from independence but earlier the growth was slow and it picked momentum after the economic reforms of 1991-92. Still India is far away from being termed as a developed economy, to transform itself into a developed economy India needs to find solution for certain problem which are discussed in the next section.
1.3 Current Problems with Indian Economy
India is a developing economy. The major problems which could be termed as a hindrance in India's growth towards a developed economy could be termed as
Infrastructure related
Power problem (the current power production is inadequate compared to requirement)
Quality of roads is below standard
Urban infrastructure needs mammoth growth
Weak agriculture performance: agriculture performance is under downslide (world bank report, 2010)
Lower physical quality of life
Adult literacy rate in India is 66%. (UNDP report, 2009)
Lack of basic facilities, around 12% of the population lacks access to safe water, 65% of the population lacks access to essential drugs and 69% of the population lacks access to sanitation.
The infant mortality rate is high (70 per thousand)
In many of these physical quality of life indicators, India's Record is worse than that of sub-Saharan Africa.
Labour market rigidities
Fiscal deficit
Out of the above listed five problems first four are related with infrastructure and human resources. In fact these problems are the characteristic of any developing nation, as a matter of fact fiscal deficit too is one of the problems faced by a developing nation (it is also seen in developed countries). The point that seperates fiscal deficit from all these problems is the fact that firstly it is an economic problem secondly it gives rise to numerous other problems which hinders the normal development of the developing nation. Fiscal deficit if handled properly gives a nation an opportunity to plan and develop accordingly. The next section would describe how fiscal deficit occurs.
1.4 Concept of fiscal deficit
To understand the concept of fiscal deficit it is necessary to understand the terms related with budget as fiscal deficit is a budgetary term. To an extent the success of a country in handling limited resources depends on how efficiently it is managed. Budget is an approach towards economic management because it clearly makes a list of all planned expenses and revenue of the state (Sullivan and Sheffric, 2003).
1.4.1 Benefits of budget
It helps in planning and formalizing goals on regular bases
It creates early warning system for potential problems
It motivates the organisation to meet plan objectives
It could be said that budget is an aid to management and not a substitute for management (Weygandt et al, 2010)
Keeping in mind all these factors it becomes very important for a country to successfully manage its budget.
1.4.2 Formation of deficit
If a budget of any country is scanned the first thing which one sees is the receipts or the revenues earned by the government. Next to follow is the expenditure by the government. If the revenue is more than the expenditure then it is budget surplus, if the revenue earned is less than the expenditure of the government then it is a case of budget deficit. Deficits are of different type 1) revenue deficit, which is equal to the difference between revenue expenditure and revenue receipt. 2) Fiscal deficit, which is equal to the difference between total expenditure and sum of revenue and capital receipts (except borrowings and liabilities) 3) primary deficit, which is the difference between fiscal deficit and interest paid (interest is paid on the money which the government takes to finance the deficit in budgets).
1.5 Aim of the research
The main aim of a developing nation is to invest in infrastructure, power, primary education, health, agriculture and water supply so that the nation could transform into a developed country. If the country is spending more than it is earning year after year this would bring cumulative pressure on macroeconomic stability of the country. Fiscal deficit leads to an unpleasant scenario where the government finance its excess expenditure over revenue by means of borrowing. Borrowing leads to payment of interest as well as the payment of interest. Continuous borrowing leads to a situation analogous to atomic chain reaction, this chain reaction if not moderated could be explosive.
The main objective of this research is to find answers of two main questions.
"Why fiscal deficit does occurs"
(this question would look in to various aspects of the receipts collected by the government that is the various sources, contribution % by each source, where the expenditure is done, which are the black hole of expenditure)
"How the fiscal deficit could be reduced / controlled"
(This question would try to find the ways how can the holes which are draining the economy be filled to stop fiscal deficit happening)
1.6 research design
This research is divided into five Chapters. Chapter one provides a brief discussion about economics, background of Indian economy, current problems of India, concept of fiscal deficit. A detailed literature review is presented in Chapter two which looks into various aspects of fiscal deficit, which forms the basis of further research and analysis. In chapter three, the Research Methodology will be examined, explaining why case study approach is used, why both quantitative as well as qualitative method have been applied for this research. Chapter four presents the analysis, findings, discussions and implications from the research conducted. Conclusions will be drawn and limitations as well as recommendations for future research will be suggested in the final chapter five.
