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Fiscal deficit: Quality matters
Wed, 3 Apr Pre-Open

India's fiscal deficit has grown to alarming levels. While that in itself is a big reason to worry, as per an article in Wall Street Journal, there is another dimension to it. We are talking about the quality of the deficit here. The deficit for a developing nation like India by itself might not have been something to worry had it been accompanied by the prospects of growth. However, that hardly seems to be the case in the country.

Fiscal expenditure is mainly composed of two components - Revenue expenditure and capital expenditure. The former includes expenses like salary payments, interest expenses and subsidies. These are the expenses that will not in any way help in capital formation or add to the GDP growth. Unfortunately, the Government is using almost 80% of its borrowings to fund such expenses. In doing so, it is leaving lesser funds for private sector to borrow for investments and hence hampering the economic growth prospects.

The growth in the capital expenditure has not kept pace with the growth in revenue expenses. Little wonder that the share of the former has come down from 40.3% to 11.3% in the last four decades. In contrast, the share of revenue deficit in the country's fiscal deficit is going up and up. The same has grown from 44.8% to 76.4% in the last four decades. Subsidies, a major component of revenue expenditure, are the main burden. And thanks to the inefficient policies and execution, they are not even fulfilling their aim to benefit the poor but are breeding further vices like fuel adulteration.

To summarise, it is not the fiscal deficit that is a cause of concern here but the fact that most of it is on account of unproductive expenses. As a result, the capital creation is not getting due importance. And that's not something that a developing country like India can afford.

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