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It is the difference between the government's total receipts (excluding borrowing) and total expenditure. Fiscal deficit gives the signal to the government about the total borrowing requirements from all sources. Components of fiscal deficit The primary component of fiscal deficit includes revenue deficit and capital expenditure. Revenue deficit: It is an economic phenomenon, where the net amount received fails to meet the predicted net amount to be received. Capital expenditure: It is the fund used by an establishment to produce physical assets like property, equipments or industrial buildings. Capital expenditure is made by the establishment to consistently maintain the operational activities. In India, the fiscal deficit is financed by obtaining funds from Reserve Bank of India, called deficit financing. The fiscal deficit is also financed by obtaining funds from the money market (primarily from banks). Arguments: Fiscal deficit lead to inflation According to the view of renowned economist John Maynard Keynes, fiscal deficits facilitates nations to escape from economic recession. From another point of view, it is believed that government need to avoid deficits to maintain a balanced budget policy. In order to relate high fiscal deficit to inflation, some economists believe that the portion of fiscal deficit, which is financed by obtaining funds from the Reserve Bank of India, directs to rise in the money stock and a higher money stock eventually heads towards inflation.
Expert recommendation Financial advisors recommend that the Government should not promote disinvestment to reduce fiscal deficits. Fiscal deficit can be reduced by bringing up revenues or by lowering expenditure. Impact Fiscal deficit reduction has an impact over the agricultural sector and social sector. Government's investments in these sectors will be reduced.
In the 2011-12 budget, the fiscal deficit overshot the target by a huge margin. The finance minister had planned for 4.6 percent; it turned out to be 5.9 percent. The budget was messed up by the RBI with its interest policy which brought down growth and therefore tax revenues, and by the government which let expenditure shoot up under political pressures. More precisely, a third of the increase in fiscal deficit came from the fall in tax revenues, mainly corporation tax, and two-thirds from the increase in subsidies, mainly food. That put the budget in a strait jacket. The finance minister did try to bridge the gap with the increase in service tax and excise duties which, along with a concession in direct taxes, would mop up 414 billion rupees. That was not enough and the finance minister had to have a go at the bulging subsidies. Currently, subsidies are 2.4 percent of GDP and to that extent inflate the fiscal deficit. The finance minister has therefore resolved that subsidies will be curbed next year. Not all but those on petroleum products and fertilisers which are regressive and together account for about two-thirds of total subsidies. The latter will be chopped down in 2012-13 to 2 percent of GDP. Not to be discouraged by the fall in tax revenue in 2011-12, the finance minister has budgeted for a 19 percent increase in tax revenues because he expects the economy to grow at 7.6 percent in 2012-13. Even if it does, the 19 percent increase, excluding additional taxation, in unlikely to come. The experience of 2011-12 is that a 1 percent increase in GDP generates 2 percent increase in tax revenues. On that basis, a shortfall in tax revenues in 2012-13 is not unlikely. It looks like the finance minister has been deliberately optimistic. The political space for curbing subsidies is limited; and with relentless inflation, the chances of RBI cutting interest rates adequately to revive investment are low. The 5.1 percent fiscal deficit that is planned, therefore, appears presumptuous
Moreover, he said, the Budget has not exactly put a leash on expenditure but has tried to rationalise subsidies on fertilizers and oil, though one needs to see if they do work out at the end of the day.
Opinions
alok (gwalior) 18 Mar, 2012 07:30 PM All deficits are self made and easy to contain.Crude oil basket has steadily risen since January 1999 from $20 to $125 a barrel or by 6.25 times and we have gradually increased its consumption as evidenced by increase in oil import bill from Rs. 27000 crore in FY 99 to about Rs. 600,000 crore or by massive 22 times this fiscal increasing its role in our energy mix. How long it will go on? How long we will keep hurting poor Indian economy by high energy cost and all important oil and gas sector by very high under recoveries? Why we are not looking at free option of infinite solar in place of cooking water heating fuels and free electric traction in place of costliest motor fuels? Easily replaceable cooking fuels are being subsidized while irreplaceable petrol is being highly taxed. This remains the greatest puzzle for me. Only pleasing part of the story is recent increase in petro products export to 60 billion dollars a year from India. Petro products should be used, priced, subsidized and taxed rightly so that these remain conducive to growth rather than jeopardizing the same.
Graphic by Sandeep Bhatnagar/Mint These redemptions are mostly in the first half of the fiscal year and so most of the borrowing might also happen in the first six months of 2012-13. That will undoubtedly put pressure on yields, which, in turn, will lead to a depreciation hit on banks investment portfolio. And given rising crude prices and expectations of fiscal slippages, interest rate cuts might not happen to the extent the market expects. Besides, the GDP growth forecast of 7.6% for the next fiscal year provides nothing to cheer about. Slow growth also means nonperforming assets will continue to haunt banks. The government has proposed to inject about Rs16,000 crore worth of capital into public sector banks, which is positive for small banks. But overall, the budget further dampens the sentiment for the sector.
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Nimesh Shah, MD & CEO, ICICI Prudential AMC, however, said that the budget has been a tight ropewalk between triggering a roadmap for fiscal consolidation and managing development & popular sentiment. "The increase in service tax by 2% and an increase in excise duty were anticipated and have resulted in some fiscal respite. The introduction of the Rajiv Gandhi Savings scheme is a clear positive for the equity market by way of increased long-term investor participation. In addition, reduction in STT on delivery by 20% has added to the investors return potential for equity," he said. Whatever be the case, we present here the sector outlook by some of market experts: Fertiliser The budget is likely to give a big boost to the fertiliser secort as "the budget has proposed a full exemption of customs duty on import duty on import of equipment for fertiliser plant for three years. Also, the government is likely to increase the subsidy to Rs 60,974 crore for the next year from the earlier estimate of 49,997 crore," said D K Aggarwal, CMD, SMC Investments and Advisors. Oil and Gas Prior to the Union budget, the oil companies were proposing 100% compensation for the underrecoveries in line with year 2008-09, but the government restrained from any such move in the budget presented. The companies were also calling for an extension of the tax holiday for both exploration and refining activities by10 years, as in case of power sector but this pitch did not materialize as per the market expectations.
"All eyes were pinged on the potential decontrol measure on diesel, but the government backed off from such shift, possibly citing the escalating inflationary levels in the country. Oil and gas exploration companies were seeking an elimination of 5 percent import tax on LNG but the Union budget on the contrary exempted natural gas and LNG from basic customs duty. The budget also revised cess on crude petroleum oil produced in India to Rs 4,500 per metric tonne. In an effort to cut down the burden on the aviation sector, the Union budget allowed direct import of aircraft turbine fuel (ATF), much to the delight of the struggling aviation industry," said C P Krishnan, whole time director of Geojit Comtrade Ltd. Textile The budget proposes various measures to promote the textile sector. The FM announced setting up of two more mega clusters, one in Andhra Pradesh and other in Jharkhand, in addition to 4 mega handloom clusters already operational. He also proposed setting up of three weavers service centre, one each in Mizoram, Nagaland and Jharkhand. The minister proposed Rs 500 crore schemes in the 12th plan for promotion and application of geo-textiles in the North East. A power loom mega cluster will be set up in Maharashtra.
Auto "Auto has to be looked in the scenario like interest rate cut that we are expecting. Last year was bad because of combination of interest rate being high and plus commodity prices also impacted their margin. This year looking at the easing of monetary policy, these companies are going to benefit," said Dinesh Thakkar, CMD, Angel Broking. He thinks that this year would be a good year for auto especially in the backdrop of that interest rate cycle are going to come down and consumptions are going to increase. "This excise duty hike was expected. The 2% hike is not very significant. I do not think this can slow down the demand, but a more important thing will be interest rates. This is because most of the auto purchases are done on credit, diesel prices and the overall economic growth. So, the auto sector should continue to do well because the entire growth story in India has been driven by consumption," he said. Banks "Banks have benefited from the budget. There are certain long-term things in the budget which will help the banking sector. One is the message of the financial inclusion. We have about far number of lower subscribers who are to bank than to telecom companies and telecom companies have virtually started in the early 1990s. So clearly financial inclusion will help banks to spread their tenets,' said Nilesh Shah, director, Axis Direct, sharing his outlook on the banking sector. "Second thing is the exemption up to Rs 10,000 by virtue of savings bank interest rate. Again this will enhance the post tax-yield to investors and help in doing spreading this financial inclusion. The third thing is import duty on gold. A lot of our savings are going towards physical assets like gold which is in some sense unproductive. Now if banks have to go towards financial inclusion, they will be far more aggressive in going towards that if they know that there is a pot which is not going to go to gold, but is going to come
to financial system. So all these things will probably deepen Indian financial sector quite well and banks will be the biggest beneficiary,"
Finance Minister Pranab Mukherjee today presented Union Budget 2012, the 81st Budget in India's history. Individually, this is Mukherjee's seventh annual Budget, second-highest by any Finance Minister. Below are opinions of some of the top level executives of the mutual industry on Budget 2012-2013. Mr.Sanjay Sachdev - President and CEO, Tata Asset Management: "Budget is pragmatic. Focus on fiscal deficit is a welcome step. The growth number looks achievable. Reduction in personal tax rates up to Rs 10 lac gives relief to a large section of people. Also capital market related measures such as Rajiv Gandhi Equity Saving Scheme and reduction in STT on delivery transactions will provide much needed impetus to attract small investors to the market." Mr Murthy Nagarajan, Head - Fixed Income, Tata Asset Management Ltd: "The total Gross borrowing programme of 5.69 Lakh crores and net borrowing of 4.79 Crores is higher compared with market expectation. The fiscal deficit number of 5.1 % of GDP is however more realistic. The borrowing programme will be front loaded, due to lower revenue receipts and higher redemptions in the first half of the financial year. The ten year G sec yields may trade in the band of 8.10 - 8.60 % in the first half of the financial year." Nimesh Shah - MD & CEO, ICICI Prudential AMC: "The Union Budget 2012 has been a tight ropewalk between triggering a roadmap for fiscal consolidation and managing development & popular sentiment. The increase in Service Tax by 2% and an increase in excise duty were anticipated and have resulted in some fiscal respite. The introduction of the Rajiv Gandhi Savings scheme is a clear positive for the equity market by way of increased long-term investor participation. In addition, reduction in STT on delivery by 20% has added to the investors return potential for equity. Going forward the budget will have to be followed by a decrease in subsidy in tune with the budget estimates. The market will require the government to take the fiscal consolidation roadmap ahead with possible increase in oil/ petrol prices, which will be crucial to providing RBI headroom for significant rate action. Until then it is over to affirmative execution by the government." Mr. Rajat Jain, CIO, Principal Mutual Fund: "There are no major negatives with the budget. It is broadly on expected lines, and there are major surprises either way. The numbers for the fiscal deficit are more realistic than they were for the last year, and with the rise in excise duty and service tax rates, should not be too difficult to get to. The government has to focus on keepings its expenditure close to the budgeted number, with about 9% increase built in the non- plan expenditure figure. The breaks given to the infrastructure sector and
companies are welcome. The opportunity for FIIs to invest in domestic corporate debt is a positive, and may lead to a deepening of the bond market." Mr. Akshay Gupta, MD&CEO, Peerless Mutual Fund: "The budget trajectory is headed in the right direction. Despite baby steps, the fiscal consolidation exercise is positive for country's finances. A good announcement on Power, Infrastructure, Agriculture and cap on subsidies is positive. Increase in excise and service taxes and lower than expected targets on disinvestment will lead to continuity on a high- inflationary and higher interest rate regime. There is no indication GST and DTC roll-out, which was largely expected, is surprising"