Fiscal Deficit and Economic Growth in an Economy - Term Paper Example

Fiscal Deficit and Economic Growth in an Economy Introduction Fiscal deficit generally refers to a situation where the level of governmental spending exceeds the rate at which it generates revenue. By taking consideration of the increasing global competition, it can be easily predicted about the necessity of huge financial investments with the prime intention of maintaining a steady state of economic prosperity. As a result, a state of fiscal stability can only be attained through minimizing the level of government expenditure and maximizing its efficiency of its revenue earning techniques. Through the attainment of positivity within the fiscal condition, the government of a nation will subsequently develop the capability of investing more towards new technological and infrastructural development that will bring in high level of financial and productive outcomes in favor of the nation (Merrill & Chung, 2014). India is a member nation of BRICS and the country is identified to be a developing economy. The country holds a global standing with respect to ‘gross national product’ (GDP) and ‘purchasing power parity’ (PPP). Multiple ups and down are identified within the economic structure of the country. However, despite of all the tediousness within its economic structure, the nation has projected remarkable survival instincts and has eventually displayed an appreciable response against its economic and fiscal issues. Such situations often results in deteriorating the rate of economic development as a result of the financial incapability of the government in context to spending more on the economic developmental procedures. Irrespective of all these economic achievements, multiple economists in the present scenario have still questioned regarding the fiscal stability of this nation, which in the practical scenario can be considered to be on the verge of collapsing (Kumar, 2014). The increased provision of government subsidies within public distribution services and sectors can be considered as the prime factors that has crippled the revenue generating capabilities of India. Understanding the gravity of the destabilizing economic and fiscal situation, the present government has shown its active participation towards the implementation of appropriate fiscal modifications within the New Year’s budget. With this initiative, the government perceives towards attaining medium or long term economic and fiscal stability through which the government can continue with its developmental activities. In accordance with the new plan, the government intends toward keeping the inflation rates at the medium level depending on which it will be calculating the possibility of attaining a better GDP growth rate (Kumar, 2014). Considering all these aspects, the paper focuses towards understanding the logic regarding why the Indian government should be worried about minimizing the level of its fiscal deficit and how it will simultaneously contribute to the economic growth of India. Research Methodology In order to carry out this research in an appropriate manner, a qualitative research has been applied in this study. In this regard, all the necessary data are specifically collected from the secondary data sources which include websites, news articles, journals, online books etc. In addition, the data collected for this research comprises both the existing as well as latest economic facts of India, which will further be analyzed in order to get a possible understanding regarding the factors that have eventually led to the development of such an unstable fiscal scenario in India. Furthermore, evaluation of the data was also conducted with the intention of finding the possible ways through which the entire situation can be retained to a stabilized state. Data Analysis The fiscal deficit rate in India has been in a state of continued fluctuation over multiple decades. The budget deficit graph provided below can be considered as clear evidence supporting the justification of continued fluctuation. Fig 1: Indian Budget Deficit between the Periods of 1992 to 2003 Source: (Trading Economicsa, 2014) Fig 2: Indian Budget Deficit between the Periods of 2004 to 2014 Source: (Trading Economicsa, 2014) From the above graphical representations, it can be clearly identified about the stability state of the Indian fiscal structure that has gone down in a drastic rate after 2008. Irrespective of the numerous efforts and policy implementations, the nation has not reached the surplus state. In this respect, effective evaluation of the above graphical representations revealed that the favorability of the budget deficit between the periods of 2004 to 2014 is better in comparison to that of the budget deficit between the periods of 1992-2003. As a result, it can be easily determined that the difference represents the fluctuation in the Indian economy. For the past few decades, it has been identified that there is a major cause of drastic economic development in India. The development in the Indian economy has been witnessed with the availability of high amount of governmental funds. These periods also witnessed massive development in almost every possible sector of India. It was due to this massive infrastructure development that has pulled the attraction of multiple foreign investors, which eventually raised the amount of FDI inflow in the nation (Venu, 2014). However, the ending phase of 2014 was subjected to the provision of excessive subsidy and overstaffing of the public sector that eventually resulted in giving rise to a cyclical increase in the current fiscal deficit rate. Taking these circumstances as evidence, it can be possibly predicted that the economic growth process of India may be hampered in the coming period as a result of the continued existence of this fiscal gap. However, with the introduction of the new government measures and lowering up of the subsidy rates, the nation has succeeded towards paying back an appreciable portion of the government’s debt from its annual GDP. Evidence regarding this fact can be analyzed in the graph provided below. Fig 3: The Contribution Made By the Indian Government towards Its Annual GDP on Year Basis Source (Trading Economicsb, 2014) The above chart projects the necessity of attaining appropriateness within the fiscal planning of the nation to promote the overall development of the Indian economy. In alignment with the context, multiple issues within the Indian economic structure can be identified that has eventually resulted in creating a wider fiscal deficit. These identified facts have been illustrated as follows. Engagement of un-necessary subsidy bills by the government has been considered as one of the major reasons that have lowered the cash reserves of the nation. In addition, a justification regarding the continued depletion within the fiscal rate can also be attained by taking reference of the per capita income and the inflation rate that has been prevalent within this nation. The graphs provided below will help in understanding the aspects in a much transparent manner. Fig 4: Data Projection of Increase in Per Capita Income within India between the Periods of 1990 to 2014 Source: (Trading Economicsc, 2014) Fig 5: Data Projection of the Inflation Rate within Indian Economy between the Periods of 2012 to 2014 Source (Trading Economicsd, 2014) From an economic perspective, it can be understood that the flow of funds within an economy will only prevail with an increase in per capita income and a decrease in the economic inflation rate. Justification regarding this projection can be provided by taking into consideration of the fact that with the increase in the per capita incomes, Indian inhabitants has the potential of spending more. However, their decision regarding spending rate may vary in case the inflation rate goes up due to the lowering of government subsidies. Such scenarios in an eventual manner will create a state of financial crisis within the nation and at the ultimate stage would force the government to undertaker spending out of its own cash reserves. Moreover, due to the increased prices of the commodities as a result of the high inflation rate, people will show less interest towards undertaking massive purchases. All these chain of events in an eventual manner would result in lower revenue earning of the government irrespective of the outgoing governmental investments (Trading Economicsd, 2014). Thus from an overall understanding, the scenario will slowly widen the fiscal deficit within the financial structure of the nation and intensively hamper the overall economic development of the nation. In terms of factual analysis, the present state of the inflation rate should be posing a lower amount of fiscal instability. However, the scenario appears to be opposite. As per the graph presented above, the inflation rate of India during the third quarter of 2014 has lowered to intuit the nation’s public towards increasing their spending rates taking reference of the fact that the per capita income has been high. This aspect finds wide alignment with the decrease in the level of fiscal deficit between the periods of 2009 to 2014. In this respect, the implementation of appropriate monetary and fiscal policies is required for stabilizing as well as improving the economic growth of the country. Failure to which may pose significant amount of risk on the nation in terms of inclining towards a state of financial crisis (Trading Economicsd, 2014). Apart from the per capita income and the inflation rate, the economic trend within the Indian government subsidy provision can also be held as equally accountable for bringing about considerable level of deficit within India’s fiscal structure. Fig 6: Data Projection Regarding the Percentage of Governmental Subsidy Provided Between the Years 2012-13 Source: (Merrill & Chung, 2014) The data projected in the above graph implies about the subsidy as provided by the governments of multiple nations. It can be identified that majority of the subsidy provided by the Indian government are consumed within the areas of health and education development. As a result of this, it is advisable that the government should lay significant amount of focus on the development of the private schools and make them capable enough of sustaining on their own revenue earning capabilities. In an associative manner, attainment of appreciable level of privatization within the medicine sector is also advisable for the government by taking consideration of the fact that privatization would bring down the level of governmental restrictions on such organizations, which would eventually increase the quality of service as well. With lowered amount of expenditure on the nation’s medicine and education sector, the percentage of governmental cash reserved would increase and thus, narrow down the fiscal deficit figure (Merrill & Chung, 2014). Below mentioned two specific graphs depict the difference between the government’s revenue earning and expenditure rates. Fig 7: Data Projection Regarding the Increase in the Revenue Earning of the Indian Government between the Periods of 2000-2013 Source: (The Ministry of Finance, 2014) Fig 8: Data Projection Regarding the Increase in Governmental Spending between the Periods of 2006-2014 Source: (Trading Economicse, 2014) From the two above mentioned graphs, it can be stated that the revenue attainment pattern of the nation finds high alignment with its spending rate. The drastic rate of improvement within India’s medicine, education and industrial sectors can be considered as highly accountable for the attainment of increased revenue (Trading Economicse, 2014). Furthermore, evaluation of these economic aspects has been done in the regression section of the discussion. Regression of the Above Projected Data The elaboration in this section comprises precise discussion between the economic terms and the increasing risk of the fiscal deficit. Fig 9: Trend Within the GDP Growth Rate of India Between the Periods of 2000 to 2014 Source: (Trading Economicsf, 2014) By taking reference of the above projected GDP graph, it can be understood that India’s GDP growth rate between the periods of 2011 and 2014 has attained stability by considerable amount. The Indian government with multiple economic efforts has attained high amount of progress in terms of developing the economic scenario of the nation. As a result, the fact regarding the existing risk of issues related to fiscal deficits cannot be completely ignored (Trading Economicsf, 2014). Justification regarding these aspects can be provided depending on the point that if the rate of fiscal deficit continues to increase, then the government will fail to provide its continued support towards the establishment and development of industrial infrastructure within the Indian economy. The level of dependency projected by Indian economy towards its government funding capabilities is identified to be an important factor for its economic development. It has been identified that the present percentage of dependency of the Indian GDP on the government’s debt amount to be 67.72 per cent. Likewise, the percentage of debt has been perceived to be increasing by 68.08 per cent till the end of 2050 (Trading Economicsf, 2014). Fig 10: Expected Increase in the Level of Governmental Debt to GDP from 2014 to 2050 Source: (Trading Economicsh, 2014) Based on the above present data, it can be stated that the pressure on the Indian government in terms of appropriately investing in the upcoming national GDP is likely to increase unless it brings down the present fiscal deficit rate by appreciable rates. Provision of increased independence to the private sectors can be considered as a beneficial alternative for the Indian government in the present day context. In alignment to all these discussed aspects, multiple economists point out the subsidy services that are provided by the Indian government to be one of the major deterrents of economic development of the nation. As per their estimates, the overall subsidy services within Indian economic system blocks out approximately $90-$100, which appears to be a huge amount. The economists also stated that eventual consumption of such major capital investments in the form of subsidy may result in giving rise to massive fiscal deficit in India (Singh, 2013). It appears to be clearly dominative regarding the possibility of bringing about considerable amount of decrease within the prices of regular consumables goods through the provision of governmental subsidies (Singh, 2013). One logical fact needed to be understood in this context that the economic development process of India cannot sustain for a longer period unless it makes some serious efforts in terms of minimizing the present prevalent fiscal deficit rates. However, Indian’s financial structure depends on multiple other international and natural factors, failure of which may hamper the economic development scenario of India by a major extent. Elaboration regarding these associated factors can be provided by taking consideration of the percentage of imports and exports carried out by the nation. Taking this as a reference, it can be identified that over the time, India has eventually become one of the major importers of oil from Gulf nations such as Iraq. Fig 11: Projection of India’s Rank and Consumption Rate among Leading Global Oil Consumers Source: (Central Intelligence Agency, 2014) Based on the above graphical representation, justification to the fact regarding India as one of the major consumers of oil resources can be attained successfully. During the period of 2011, India was ranked as the fifth major consumer of oil. In this regard, appropriate evaluation of the followed up graph will help in elaborating the reason of India’s stagnated fiscal deficit in a detail manner. Fig 12: Projection of India’s Daily Production of Crude Oil in BBL/D/1K Source: (Trading Economicsg, 2014) An evaluation of the second graph would reveal India’s consumption of per day crude oil to be much more in comparison to that of its production rate. In an associated manner, it can be also asserted that India in the present scenario will have to heavily invest in terms of importing oil for meeting the increased requirement of crude oil for decreased production of crude oil. Moreover, due to the continuation of the crisis state within Iraq, India is likely to face more issues in context to the oil import prices. As a result, the government will have to make significant amount of its reserved financial contributions to avail the necessary economic requirements, which eventually led to the increasing fiscal deficit gap (Zee Media Corporation Ltd, 2014). In addition, India is agriculture oriented nation with a huge population has to majorly rely on its agricultural sector, failure to which may eventually give rise to a massive food supply crisis within the nation. In this respect, the nation will fail in terms of harvesting the necessary amount of food supply for lack of rain and water supply. The prevalence of traditional farming techniques may add up towards deteriorating the situation to much greater extent. In a cause and effect relationship, the Indian government will be forced to import the necessary deficit of food supply from international importers at a much higher price. Thus, based on the aforementioned factors, it can be concluded that the ecological system plays a major role towards widening of the financial deficit gap within the nation and eventually projected its potential of bringing about considerable amount of deterioration within the economic development of India (Zee Media Corporation Ltd, 2014). Irrespective of all these facts, financial discrepancy over the past multiple decades that has clouded the effective economic development of the nation is related to the illegal deposit of black money within Swiss bank. This financial offence is considered as one of the major contributors toward the deteriorating fiscal deficit scenario within India. In response, the government has eventually established multiple committees to keep such financial offences in check (Planning Commission, 2014). Structuring of appropriate economic reforms for the poor and deprived population in the Indian economy has been a major part of this nation’s developmental plan. As a result, effective structuring of such reforms require considerable amount of government spending that eventually depletes the financial reserves, which results in continued existence of the fiscal deficit (Planning Commission, 2014). In this respect, the major regressive factors that have resulted in maintaining the current level of fiscal deficit at a persistent rate are considered to be important for affecting the economic growth of India as a whole. Contextually, the Indian government has undertaken multiple steps in order to ensure that the current situation moves forward a state of improvement rather than going into further deterioration. The reflection of some of these initiatives can be attained from the budgetary plans as projected by the nation over the years. Based on the above stated analysis, it can be identified that the GDP rate should be going up and on the other hand, the government’s debt to GDP should be coming down. However, the factual data that has been obtained projects a contrary alignment with the logical perspective. The ‘Multiple R’ value i.e. 0.289582559 is quite less than expected along with the ‘R Square’ value i.e. 0.083858058. Moreover, the obtained intercept value also projects a much lower decimal value than 1. Taking reference of all these, it can be concluded that at the current pace of governmental debt to GDP, the economic growth rate of India is likely to go down in the upcoming years. Results The findings from the secondary sources implied that urbanization in India has been a highly preferred aspect in the present form of economic scenario. Accordingly, the Indian government has projected its plan of focusing on harvesting protein rich food materials rather than just remaining confined to the production of grains and cereals. This may help in minimizing the existing load on the Indian agricultural sector along with the government’s burden in terms of continuously developing that sector (Yahoo! - News Network, 2014). In addition, the government in the latest economic budget plan has also stipulated its initiative of establishing multiple enquiry commissions that will keep a close eye on every small or large financial transaction carried out. The prime intention of such initiative will remain focused on bringing down the outflow of black money from Indian economy. Moreover, by taking consideration of the above facts, multiple results can also be concluded in relation to the governmental initiatives that have been undertaken to minimize the level of fiscal deficit within the Indian economy (Yahoo! - News Network, 2014). A reflection of such initiative can be attained within the decision undertaken by the present Indian government in terms of privatizing some of the aviating services currently functional within this nation. The intention of the government towards undertaking such initiative can be elaborated by taking consideration of the massive failures regarding payment of governmental revenues by multiple domestic and international airports (Yahoo! - News Network, 2014). Discussions It has been observed in this context from the study of secondary data that the India economy has depicted fluctuating economic growth over the past decade. In addition, it has been recognized that currently, the economy has witnessed growth in economic terms. The growth of the Indian economy has been witnessed due to appreciate level of privatization within of different industrial sectors that include aviation, education and medicine sectors have eventually resulted in attracting multiple other foreign players having intensive financial structure and appropriate profit generation capabilities. Integrative effects of all these will eventually increase FDI investment in India and thus, support the nation’s fiscal deficit rate in terms of attaining stability. Likewise, privatization of the India’s coal industry also turned out to be a major beneficiary aspect for the Indian government through which it has attained high amount of profit from the foreign players who intend to control and utilize the Indian coal sector (Kumar & Das, 2014). As a chain effect, the present government has also tended towards minimizing the level of inspection constrains associated with the labor forces with the prime intention of developing and reinforcing the small industrial sectors that turns out to be an effective profit generation tool for the nation (Kumar & Das, 2014). Oil and natural gas has always played a major role in context to support the Indian economy over multiple decades. However, the existence of intensive tariff and mandate discount rates, have crippled this nation to generate appropriate profits. Understanding this drawback, the present government has increased the percentage of discounts that the oil manufacturing industries are supposed to provide to the fuel retailers. This has eventually resulted in attracting the interests of multiple foreign investors in terms of investing within the oil and natural gas producing sectors of India (Kumar & Das, 2014). In the cause and effect relationship, it can be recognized that with the increasing amount of foreign investment, the reliance of the Indian oil sector on governmental subsidies will eventually come down along with the present state of fiscal deficit. Associatively, the government will also be able to direct its attention towards financing and developing Indian’s power generation sectors (Wilkes, 2014). The results attained from the above aspects also elaborate multiple consequential impacts that have hampered the economic development of this nation to a certain extent. The elaboration in this context includes the fact that privatization will eventually result in imparting excessive work pressure on the labor forces that currently forms the major resource of almost every governmental organization. In accordance with such allegiance, the labor forces within the governmental sectors have caused multiple riots and strikes that have always been accounted as one of the major economic development deterrent factors in India (NDTV Convergence Limited, 2014). Conclusion From the above discussion, it can be comprehended that the Indian economy has been facing continuous challenges regarding its destabilized rates of fiscal deficits. Multiple facts relating to the necessity and significance of India’s fiscal deficit rate in terms of attaining an appropriate and sustainable economic growth rate provide adequate understanding about the instable economic growth of the country. The prime focus of this overall discussion has been on the existence of inefficient subsidy rates within the Indian economic structure that has eventually resulted in giving rise to fiscal deficit. In this respect, the statistical data provide and elaborate understanding and information about the causes that have resulted in giving rise to the prevalence of budget deficit within the Indian economic structure. From the logical perspective, it can be stated that the nation’s reliance on the implementation of power generation techniques has resulted in widening the fiscal deficit gap due to the fact that this nation imports a major portion of its power generation resources from external supplies. Moreover, privatization of different sectors that include medicine, aviation, education and oil producing sectors are also seemed to be accountable for developing the economic conditions to a large extent. The development of the sectors has resulted in increased inflow of FDI in the nation, which has assisted in developing the Indian economy with better economic stability. Thus, considering the above fact, it can be comprehended that India in the coming time will have to bring about significant amount of development within its revenue generation areas and failure to which will result in widening the fiscal deficit gap and deteriorating the present economic development pace. References Central Intelligence Agency. (2014). Country comparison: Refined petroleum products – consumption. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/rankorder/2246rank.html Kumar, M. (2014). Economic Survey urges strong steps to contain fiscal deficit. Retrieved from http://in.reuters.com/article/2014/07/09/india-economic-report-budget-idINKBN0FE0J720140709 Merrill, L., & Chung, V. (2014). Financing the sustainable development goals through fossil-fuel subsidy reform: opportunities in Southeast Asia, India and China. The International Institute for Sustainable Development, 1-22. Planning Commission. (2014). 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