Steps To Contain Declining GDP
The aspiration of $ 5 Trillion economy in India is achievable if all States and Sectors collectively make it their ambition and work with good governance on it.
India is an economy of 29 states and vibrant Union Territories and it is important to gauge the potential of each one of them, has to come up with their own strategy to be a part of country's economy. Each state has its manufacturing and commerce strengths which it monopolizes. The growth at national level is an aggregation of growth at state level. As such, conscious efforts by
State Governments to facilitate growth of industry and overall Socio-Economic Development in
their regions will push India's growth upwards. On the other hand, states should ensure percolation
of reform measures up to the Grass Root levels to ensure growth.
Reasons for increase in Fiscal Deficit -
These are -
1) Increase in Subsidies - on a number of items such as Fertilizers, Food items, Exports etc.
causing fiscal imbalances.
2) Payment of Interest - on Domestic and Foreign loans thereby increase in interest burden. Govt.
has increased considerably excessive borrowing during the past few decades. The borrowings
have been spent on unproductive purposes.
3) Poor performance of Public Sector - Due to Low labor efficiency, Lack of professionalism,
Political interference, inefficiency and corruption in Management, Surplus staff etc. Due to
these reasons, Govt. gets low revenue by way of dividends from Public Sector units.
4) Defence expenditure - Govt. has limited scope to reduce Defence expenditure which is increasing
over the years due to security problems across the borders.
5) Tax Evasion - Tax system is made up of complex procedures with number of exemptions.
Corruption is rampant at all levels leading to fiscal imbalances.
6) Weak Revenue Mobilization - Inadequate rise in Revenue Receipts consisting of Taxes, net of
States' share and Non-Tax Revenue has increased at slower rate than that of growth in expenditure.
7) Other causes - Unproductive expenditure by the Govt., Weak Resource mobilization and Low
Capital Formation.
The Fiscal imbalance has resulted in consequences like Mounting Inflation, Deficit in Balance of Payment etc. as also adversely effected the economy. Govt. must implement major fiscal correction policies to overcome this crisis. The consequences of Fiscal crisis i.e. a sustained high fiscal deficit over 20 years are as follows -
1) Debt Problems - Increasing levels of borrowing for financing activities having nil or low yields,
interest payment increase at faster rate. As such, non-productive expenditure rise higher and
higher Revenue Deficits.
2) Cut in Capital Expenditure - Due to Debt service payments, accounting for higher proportion of
expenditure, all other activities of Govt. suffer- main of which is Capital Expenditure- both in
Economic and Social infrastructure.
3) High Interest Rates - Continuation of high level of public borrowing has an effect on the economy
thorough existence of high interest rates.
4) No increase in expenditure on Health and Education - High Debt Service payments also prevents
in or even maintenance of expenditure on social services like health and education.
5) Other consequences -
a) Fiscal Imbalance may also lead to inflation in the economy.
b) High Fiscal Deficit may discourage foreign investment in the country.
c) Govt. has to borrow funds to solve fiscal deficit which put extra burden for payment of
interest on the Govt., worsening fiscal imbalances further.
Following measures can be adopted to reduce public expenditure for reducing fiscal deficit and check inflation '
1) Reduction in expenditure on major subsidies e.g. food, exports, fertilizers, electricity etc. and
shifting it to new enterprise zones to be established in areas of high unemployment. This will
boost more employment prospects.
2) Sums spent on Interest payments on past debts which almost accounts for 40% of expenditure
on Revenue account of the Govt. Funds raised through disinvestment in Public sector be used
to repay part of old public debt rather than financing current expenditure. Repayment of public
funds quickly will further reduce burden of interest payments in future.
3) Budgetary support to Public Sector enterprises other than infrastructure projects should be
substantially reduced. Public Sector enterprises should be asked to raise funds from banks,
market after reviewing the pricing policy of their products. It should be such that at least their
user cost is recovered. They should make surpluses for their own development so that their
dependence on Govt. budgetary support be dispensed with.
4) Reduction in expenditure on foreign tours, LTC, Leave encashment , Bonus etc. if the Govt.
is determined to cut public expenditure. Review of TA/DA rules will go a long way in managing
such expenditure.
5) All Govt. departments should adopt austerity measures to curtail unnecessary expenditure.
6) Increasing revenue from taxation - Apart from reducing Govt. expenditure, Revenue has to be
raised from this head. Tax base is narrow for both Direct and Indirect taxes, only about 2% of
population pays Income Tax. It should be broadened by taxing agricultural income (over and
above a level) and from unorganized industrial and service sectors. Exemptions and deductions
be with drawn to broaden the tax base. It is to be noted that Indian experience of last 50 years
do not reveal intended objectives.
7) Intervention to achieve currency depreciation by selling the Domestic currency in Foreign
Exchange market.
8) Establish Green Investment Bank for renewable energy investment. To persuade Investors to
increase and accelerate their investment in Renewable Energy and energy efficiency.
9) Remove Trade protectionism / Tariff wars - To protect domestic industry from unfair
competition from foreign ones.
10) Increase plan for spending by putting financial goals to make it more concrete and achievable.
The adoption of above measures of reducing public expenditure and increasing revenue, it will
be possible to reduce Fiscal Deficit to a safe limit. The reduction in Fiscal Deficit will prevent emergence of excess demand in the economy and thereby help in controlling inflation and achieving
price stability.
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India is an economy of 29 states and vibrant Union Territories and it is important to gauge the potential of each one of them, has to come up with their own strategy to be a part of country's economy. Each state has its manufacturing and commerce strengths which it monopolizes. The growth at national level is an aggregation of growth at state level. As such, conscious efforts by
State Governments to facilitate growth of industry and overall Socio-Economic Development in
their regions will push India's growth upwards. On the other hand, states should ensure percolation
of reform measures up to the Grass Root levels to ensure growth.
Reasons for increase in Fiscal Deficit -
These are -
1) Increase in Subsidies - on a number of items such as Fertilizers, Food items, Exports etc.
causing fiscal imbalances.
2) Payment of Interest - on Domestic and Foreign loans thereby increase in interest burden. Govt.
has increased considerably excessive borrowing during the past few decades. The borrowings
have been spent on unproductive purposes.
3) Poor performance of Public Sector - Due to Low labor efficiency, Lack of professionalism,
Political interference, inefficiency and corruption in Management, Surplus staff etc. Due to
these reasons, Govt. gets low revenue by way of dividends from Public Sector units.
4) Defence expenditure - Govt. has limited scope to reduce Defence expenditure which is increasing
over the years due to security problems across the borders.
5) Tax Evasion - Tax system is made up of complex procedures with number of exemptions.
Corruption is rampant at all levels leading to fiscal imbalances.
6) Weak Revenue Mobilization - Inadequate rise in Revenue Receipts consisting of Taxes, net of
States' share and Non-Tax Revenue has increased at slower rate than that of growth in expenditure.
7) Other causes - Unproductive expenditure by the Govt., Weak Resource mobilization and Low
Capital Formation.
The Fiscal imbalance has resulted in consequences like Mounting Inflation, Deficit in Balance of Payment etc. as also adversely effected the economy. Govt. must implement major fiscal correction policies to overcome this crisis. The consequences of Fiscal crisis i.e. a sustained high fiscal deficit over 20 years are as follows -
1) Debt Problems - Increasing levels of borrowing for financing activities having nil or low yields,
interest payment increase at faster rate. As such, non-productive expenditure rise higher and
higher Revenue Deficits.
2) Cut in Capital Expenditure - Due to Debt service payments, accounting for higher proportion of
expenditure, all other activities of Govt. suffer- main of which is Capital Expenditure- both in
Economic and Social infrastructure.
3) High Interest Rates - Continuation of high level of public borrowing has an effect on the economy
thorough existence of high interest rates.
4) No increase in expenditure on Health and Education - High Debt Service payments also prevents
in or even maintenance of expenditure on social services like health and education.
5) Other consequences -
a) Fiscal Imbalance may also lead to inflation in the economy.
b) High Fiscal Deficit may discourage foreign investment in the country.
c) Govt. has to borrow funds to solve fiscal deficit which put extra burden for payment of
interest on the Govt., worsening fiscal imbalances further.
Following measures can be adopted to reduce public expenditure for reducing fiscal deficit and check inflation '
1) Reduction in expenditure on major subsidies e.g. food, exports, fertilizers, electricity etc. and
shifting it to new enterprise zones to be established in areas of high unemployment. This will
boost more employment prospects.
2) Sums spent on Interest payments on past debts which almost accounts for 40% of expenditure
on Revenue account of the Govt. Funds raised through disinvestment in Public sector be used
to repay part of old public debt rather than financing current expenditure. Repayment of public
funds quickly will further reduce burden of interest payments in future.
3) Budgetary support to Public Sector enterprises other than infrastructure projects should be
substantially reduced. Public Sector enterprises should be asked to raise funds from banks,
market after reviewing the pricing policy of their products. It should be such that at least their
user cost is recovered. They should make surpluses for their own development so that their
dependence on Govt. budgetary support be dispensed with.
4) Reduction in expenditure on foreign tours, LTC, Leave encashment , Bonus etc. if the Govt.
is determined to cut public expenditure. Review of TA/DA rules will go a long way in managing
such expenditure.
5) All Govt. departments should adopt austerity measures to curtail unnecessary expenditure.
6) Increasing revenue from taxation - Apart from reducing Govt. expenditure, Revenue has to be
raised from this head. Tax base is narrow for both Direct and Indirect taxes, only about 2% of
population pays Income Tax. It should be broadened by taxing agricultural income (over and
above a level) and from unorganized industrial and service sectors. Exemptions and deductions
be with drawn to broaden the tax base. It is to be noted that Indian experience of last 50 years
do not reveal intended objectives.
7) Intervention to achieve currency depreciation by selling the Domestic currency in Foreign
Exchange market.
8) Establish Green Investment Bank for renewable energy investment. To persuade Investors to
increase and accelerate their investment in Renewable Energy and energy efficiency.
9) Remove Trade protectionism / Tariff wars - To protect domestic industry from unfair
competition from foreign ones.
10) Increase plan for spending by putting financial goals to make it more concrete and achievable.
The adoption of above measures of reducing public expenditure and increasing revenue, it will
be possible to reduce Fiscal Deficit to a safe limit. The reduction in Fiscal Deficit will prevent emergence of excess demand in the economy and thereby help in controlling inflation and achieving
price stability.
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