Measures to correct budget deficit?

Question

Answer

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.

In the Indian context, the following measures can be adopted to reduce fiscal deficit and thereby to reduce inflationary pressures in the economy. We first spell out the 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.

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.

4. Budgetary support to public sector enterprises other than infrastructure projects should be substantially reduced. Further, public sector enterprises should be asked to 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.

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 these exemptions and deductions do not promote the intended objectives.

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.

4. To mobilise more resources through indirect taxes, more commodities should be brought within the tax net.

Top Courses for CommerceView all

Chapter Notes for Commerce

Economics Class 12

Economics Class 11

NCERT Books & Solutions for Commerce

Economics for CBSE Class 12 Board Examinations

Top Courses for Commerce

Top Courses for Commerce

Related Content

Commerce Courses

Other Courses

How To Prepare?

Related Exams

Company