• SEPTEMBER 5, 2000

Combined fiscal deficit: The greater problem

Often in discussions, we stop at criticizing the way in which the central government has been utilizing its resources. We mention how the fiscal deficit to GDP (gross domestic product) ratio rose to 5.6% as against the targeted level of 4%. However, in all this, we miss out an increasing source of concern. The various state governments.

FY91 was a crisis year for the economy. In that year, the combined gross fiscal deficit (GFD) of the central and state governments was put at 10%. Cut to FY00 and there is talk of buoyancy, reforms, foreign investment and a booming stock market. Amidst all this the fundamentals do not seem to have altered much. Infact, during FY00, the combined GFD of the government was put at 9.9%! The contribution of the state government to the deficit has risen dramatically. Infact, even in FY01, the GFD is projected to be at 8.6%.

The issue at the State level is similar to the situation faced by the government - rising expenditures even as revenues failed to keep pace. Worse still, developmental expenditure has taken a hit in an attempt to control the deficits. Indeed in FY01, developmental expenditure (both at the centre and states combined) is anticipated to grow at 2.3% against a projected growth of 12% in non-developmental expenditure.

The truth is that in fiscal terms we continue to face a grim situation. There is little effort on part of the government to reduce its size and as a result, deficits continue to surge. This has created other problems like higher interest rates, which stifle efficiency in the economy. However, hope can be derived from the fact that there is increasing buoyancy in the economy. The private sector is being promoted by improving the policy environment. Nevertheless a sustainable improvement in the fiscal scenario cannot be achieved until the governments (both central and state) reduce their size.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407