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DEFICITS
EficitsDEFICITS
Types Deficits
- Revenue deficit
- Fiscal deficit
- Primary deficit
- Monetized deficit
Revenue Deficit
- When Revenue Expenditure exceeds revenue Receipts
- Fiscal deficit
- When total expenditure (Revenue + Capital) exceeds total receipts (Revenue + Capital).
Primary deficit
- Fiscal deficit – interest payments
Monetized deficit
- It is a part of fiscal deficit provided by the RBI
Deficit financing
- The act f supporting a deficit budget by a government
- First used in USA in 1930s
- India tried it in 1969
Means of deficit financing
- External borrowings
- External aids and grants
- Internal borrowings
- Printing currency
Fiscal Responsibility Budget Management (FRBM) Act 2003
Main Highlights:
- To reduce Fiscal & Revenue deficit so as to eliminate revenue deficit by 31st March 2008
- Annual targets 9 Revenue deficit by 0.5 % per annum and Fiscal deficit by 0.3% p.a
- Fiscal deficit and revenue deficit may exceed targets only on the grounds of National security, calamity etc
- GoI not to borrow from RBI except by Ways & Means Advances (WMAs)
- RBI not to subscribe to the primary issue of GoI securities from 2006-07
- To ensure greater transparency in fiscal operations
- Each year GoI to lay 3 statements in the parliament
- Fiscal policy strategy statement
- Medium term fiscal policy statement
- Macroeconomic framework statement
- Finance Minister to make quarterly review of trends in receipts & expenditure in relation to Budget
- In 2006-07, in case of the Central government, proposed reduction in revenue and Fiscal deficit were put at 0.6 % and 0.5% respectively (higher than the FRBMA Rules), though the reduction suffered in 2005-06 due to higher devolution to states by centre on account of the recommendations of 12th Finance Commission. Sates also showed considerable improvement. The fiscal deficit of the states declined by 1.6% post FRBMA from 4.5 % in 2003-04 to 2.6% in 2006-07 of their GDP
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FAQs on DEFICITS - Economics, UPSC, IAS. - Indian Economy (Prelims) by Shahid Ali
| 1. What are deficits in economics? |  |
Ans. Deficits in economics refer to the situation when a government's total expenditure exceeds its total revenue in a given period. It is commonly measured as a fiscal deficit, which is the difference between government's total expenditure and its total revenue (excluding borrowings). Deficits can occur due to various factors such as increased government spending, decreased tax revenue, or economic downturns.
| 2. How does a fiscal deficit affect the economy? | |
Ans. A fiscal deficit can have both positive and negative effects on the economy. In the short term, a fiscal deficit can stimulate economic growth by increasing government spending and boosting aggregate demand. This can lead to increased investment, job creation, and overall economic expansion. However, if the deficit is not managed properly, it can also have negative consequences. It can lead to higher government borrowing, increasing public debt, and potentially crowding out private investment. Moreover, persistent deficits can result in inflation, higher interest rates, and macroeconomic instability.
| 3. What are the implications of deficits for a country's debt? | |
Ans. Deficits can contribute to a country's debt accumulation. When a government runs a deficit, it needs to borrow money to cover the shortfall. This borrowing results in the accumulation of public debt. If deficits persist over time, the debt burden can become unsustainable, leading to concerns about the country's ability to repay its obligations. High levels of debt can also lead to credit rating downgrades, making it more expensive for the government to borrow in the future. Therefore, managing deficits is crucial to ensure a sustainable level of public debt.
| 4. How do deficits impact interest rates? | |
Ans. Deficits can potentially impact interest rates in an economy. When a government runs a deficit and needs to borrow money, it increases the demand for loanable funds in the financial markets. This increased demand for borrowing can put upward pressure on interest rates. Higher interest rates can then have implications for businesses and consumers as the cost of borrowing increases. It can also affect the exchange rate and the attractiveness of foreign investment. Therefore, deficits can indirectly influence interest rates and overall financial conditions in an economy.
| 5. What measures can be taken to reduce deficits? | |
Ans. There are several measures that can be taken to reduce deficits. These include:
1. Increasing taxes: Governments can increase tax rates or broaden the tax base to generate additional revenue and reduce the deficit.
2. Cutting government spending: Governments can implement austerity measures by reducing expenditure in various areas such as infrastructure, defense, or social welfare programs.
3. Economic reforms: Implementing structural reforms can lead to increased economic growth, which can boost tax revenue and reduce the deficit.
4. Privatization: Selling government-owned assets or enterprises can generate funds that can be used to reduce the deficit.
5. Improving tax compliance: Strengthening tax administration and reducing tax evasion can help increase tax revenue and reduce the deficit.
It is important to note that the appropriate measures to reduce deficits may vary depending on the specific economic and political context of a country.
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