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Posted by: Deepa Vasudevan and Uma Shashikant on Tue, Feb 18th, 2014

Fiscal Deficit- How the Red Line was Honoured

The main achievement of Mr.Chidambaram's interim budget for 2014-15 (indeed, some would say the only achievement) was the ability to stay within his self-imposed fiscal deficit target of 4.8% of GDP. Actually, he went further, and held fiscal deficit at 4.6% of GDP.


In the last decade, the fiscal deficit has emerged as the most important measure of the soundness of a government’s finances. It has become particularly relevant for emerging economies such as India, which run chronic deficits and therefore need foreign capital flows to fund domestic investment. The “investment” grade rating bestowed on fiscally sound economies has become a necessary pre-condition to attract overseas investors.  Thus the fiscal deficit is keenly tracked by market participants; in fact, on the basis of available fiscal data, markets were speculating that the deficit for 2013-14 would cross the budgeted 4.8% of GDP.


What is fiscal deficit made of?


Let us see how the deficit was contained within target in a year when revenues slowed, expenditures grew, and there was very little progress on disinvestment. To start with fiscal deficit has five components linked by the formula:



This formula appears formidable, but is actually quite intuitive. Deficit arises when the sum of expenditures is higher than the revenues and other incomes such as disinvestment. If the government wants to reduce fiscal deficit it could try to


1. Reduce revenue expenditure: Cut running expenses such as subsidies, interest , salaries

2. Reduce capital expenditure: Cut investment in capital assets such as infrastructure projects

3. Increase Disinvestment:  Sell government stakes in companies to generate funds

4. Increase Tax revenues: Collect more money through direct and indirect taxes

5. Increase Non-tax revenues: Collect dividends from PSUs, or auction spectrum band-widths


What was “achieved” in 2013-14 and how?

The government budgeted to keep fiscal deficit at Rs.542,499 crore in 2013-14, but brought it down to Rs.524,539 crore, despite falling tax revenues and poor disinvestment earnings. Table 1 shows how this was managed.


Table 1: How the Fiscal Deficit was contained in 2013-14

Table 1: How the Fiscal Deficit was contained in 2013-14

Poor economic growth ensured that tax revenues fell sharply across all tax types. Market conditions were unfavourable for disinvestment, not even half of the budgeted Rs.40,000 crore was raised in 2013-14. The government resorted to sharp expenditure cuts, especially in plan expenditure, to manage the shortfall. In addition, non-tax revenues were boosted through revenues from spectrum auctions and large dividend payouts from PSUs. Finally, capital expenditure was slashed by nearly 17% over the budgeted amount to ensure that the target was achieved.


What can be said about this “achievement”?


A fiscally prudent government would try to reduce revenue expenditure and increase tax revenues to keep the fiscal deficit down. Reducing capital expenditure or relying non-tax revenues are unsustainable ways to contain the deficit. At this point the government has resorted to short-term ways to achieve its target. Keeping the fiscal deficit down in an election year is a creditable achievement: let us not forget the turmoil that the economy went through in July 2013 when hints of a widening current account deficit led to large capital outflows and steep rupee depreciation. If Mr.Chidambaram had not kept his word, markets would have reacted negatively and another crisis situation may have been created. But in the long term, this is not a fiscally prudent path. The new government should remember that, and act accordingly when its finance minister revisits this budget.

Ajit Purohit on Thu, Feb 20th, 2014 4:52:39 pm

It was made easy to understand.

Bimal Shah on Thu, Feb 20th, 2014 4:08:59 pm

Looking at all figures one get feeling that our FM has done 'hard work' to to proove what he learned in 'Hawards' wrong.

raj kumar on Wed, Feb 19th, 2014 10:39:27 am

I find he has played with numbers,dividends are preponed ,subisidies are postponed to next year,expecting better tax revenue in 4th qtr to reach the redline of 4.8% is not fiscal prudence but misrepresting the numbers.

Sandeep Tripathi on Wed, Feb 19th, 2014 9:49:20 am

Dear Ms.Shashikant & Ms.Vasudevan, Very well written & smple to understand article on the subject of fiscal deficit.Clearly one can see through the financial jugglery & brazen "uneconomical" sense of the harvard eductaed FM.Unfortunately we have to bear with a political economist & not somebody who is true to the job the chair of FM vest in him.

Mansing Mane on Wed, Feb 19th, 2014 6:31:45 am

Thanks we understand it in detail.

sachin sodhi on Tue, Feb 18th, 2014 7:57:46 pm

However, growth has been affected due to all this.if core inflation will also control,we could able to mange the growth as well.

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