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Are you a little confused when you read about the Budget in newspapers? Do terms such as current account deficit, fiscal deficit, Government expenditure, excise duties, import duties boggle you? Here’s de-jargonising some of these terms.
On expenditure
The Government classifies its expenditure in terms of planned expenditure and non-planned expenditure.
Planned expenditure is what is spent through centrally-sponsored programmes and flagship schemes such as Bharat Nirman, the Mahatma Gandhi National Rural Employment Guarantee Act and the National Rural Health Mission. Besides this, it includes the Centre’s assistance to States and Union Territories. For 2013-14 fiscal, Rs 5.55 lakh crore is earmarked for planned expenditure. For the last fiscal, it was Rs 5.21 lakh crore.
Non-planned expenditure refers to all other expenditures such as that on defence , subsidies, interest payments, wage and salary payments to Government employees, grants to foreign governments and so on. For the 2013-14 fiscal, Rs 11.1 lakh crore has been earmarked for this.
On deficits
Now, the Government has to finance such expenditure through its revenues. These revenues may not match up to the level of expenditure.
This is where fiscal deficit comes in. It is the difference between the Government’s total expenditure and total receipts or revenues, excluding borrowings.
Where does the Government get revenues from? Tax revenues (net of transfer payments - payments to households for social objectives such as maintaining minimum living standards, providing health care), one-time sources such as disinvestment, spectrum auction and so on. These may, as has been the case, fall short of estimates.
Deficit is financed by borrowings from the Reserve Bank of India or through market borrowings, mostly from banks or large institutional investors. India’s current fiscal deficit is expected to be around 5.1 per cent. The aim is to bring this down to 4.8 per cent of the GDP by the next fiscal. Current account deficit (CAD) is the difference between a country’s total exports of goods, services and transfers (such as foreign aid) and total imports of goods, services and transfers. The difference is financed by foreign portfolio flows such as FII, FDI, external commercial borrowings, foreign deposits (such as NRI deposits), and so on.
It isn’t necessary that a CAD is harmful for a country. Say a country is importing heavy machinery which will improve the production capacity or make the current production capacity more efficient.
That’s a good thing. But if the CAD is because of importing goods which are mainly for consumption purposes such as luxury cars, which does not add to production capacities or fuel exports, then it is harmful for the country.
CAD can be sustained up to certain threshold. If a country suffers a high CAD for a sustained period of time, it could be difficult to keep attracting required inflows or finance imports. It could further increase a country’s vulnerability to international financial volatility.
A high fiscal and current account deficit could lead to a danger of being down-graded by ratings agencies, making it harder and more expensive to raise finance. Investors could lose faith in the country’s ability to sustain growth. India’s CAD stood at 4.6 per cent of the GDP for the first half of the current fiscal.
>Shaurya.mishra@thehindu.co.in
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