FISCAL DEFICIT VS ECONOMIC GROWTH: WHICH IS BETTER FOR INDIA?

“Having loads of money doesn’t make you a better person, spending it smart does.”

- Zaid K. Abdelnour

 

A budget is a powerful instrument in the hands of the government. From managing the purse of the poor to providing world-class infrastructure to the billion population of the country, the demands on the government finances are endless. It has always been a tough task for the government to choose between fiscal deficit and economic growth.

Fiscal deficit is nothing but the difference between how much the government spends vs how much the government earns. In general, the safe level of fiscal deficit is considered to be 5% of the GDP. The current (FY2020-21) fiscal deficit of India is 9.3% of GDP, which is much higher than the desired levels. Though it is always good to have shrewd limits, higher fiscal deficit cannot be considered alarming all the time. In the present scenario, government spending is almost the only driver of growth. Hence, it would be a false belief to consider cutting on the spending would boost the economic growth. Here, what matters most is not the increased spending but rather what the spending is for. 

In a developing country like India, public spending must be more in the areas like electricity, transportation and technology as they would facilitate the ease of doing business and promote economic growth. Routing expenditures to private sector would even be more efficient as they generate more gains and attract foreign investments. The money spent on productive assets like SEZs creates job opportunities in the economy. Hence it is necessary to inculcate the habit of digging up wells and filling up the same. In this process, though there is no great asset created but the wages earned by the people generate demand. 

In contrast, government could push demand by rationalizing taxes. Cutting on the tax rate and simplifying the corporate tax regime would put money in the hands of people which would increase the spending and create demand in the economy. Hence in order to create the much needed counter cyclical stimulus to the economy, it is necessary to spend on creation of capital assets which create liquidity in the economy and promote economic growth. 

Written by: Anjana Madhulika (Batch of 2020-22)

LinkedIn: https://www.linkedin.com/in/anjana-madhulika/

Author Details:

Name	Anjana Madhulika
Batch	2020-2022
Vertical	E5
LinkedIn	Anjana Madhulika