INTRODUCTION

The economy of India is the tenth-largest in the world by nominal GDP and the thirdlargest by purchasing power parity(PPP). On a per-capita-income basis, India ranked 141st by nominal GDP and 130th by GDP (PPP) in 2012, according to the IMF. India is the 19thlargest exporter and the10th-largest importer in the world. The economy slowed to around 5.0% for the 201213 fiscal year compared with 6.2% in the previous fiscal. On 28 August 2013 the Indian rupee hit an all time low of 68.80 against the US dollar. In order to control the fall in rupee, the government introduced capital controls on outward investment by both corporate and individuals. India's GDP grew by 9.3% in 201011; thus, the growth rate has nearly halved in just three years. GDP growth rose marginally to 4.8% during the quarter through March 2013, from about 4.7% in the previous quarter. The government has forecast a growth rate of 6.1%-6.7% for the year 201314, whilst the RBI expects the same to be at 5.7%. Besides this, India suffered a very high fiscal deficit of US$ 88 billion (4.8% of GDP) in the year 201213. The Indian Government aims to cut the fiscal deficit to US$ 70 billion.

Trends in Deficit of Central Government in India:

Traces the trends in deficits of central government over the past four decades. The gross fiscal deficit as a percent of Gross Domestic Product (GDP) increased from 3.04 percent of GDP in 1970-71 to the peak of 8.37 percent in 1986-87 and then declined to 4.84 percent in 1996-97. It was around 7 percent of GDP during 1987-88 to 1990-91. During the 1990s the average fiscal deficit as a percent of GDP was 5.67 percent. However, after 2003-04 central governments contained the fiscal deficit from 4.48 percent of GDP to its all time minimum of 2.54 percent in the year 2007-08. Then it increased to 6.48 percent in 2009-10 and declined to 5.89 percent. Similarly primary deficit, which is fiscal deficit excluding interest payment has increased from 1.74 percent in 1970-71 to a peak of 5.43 percent in 1986-87 and declined to 0.53 percent of GDP in 1996-97. Primary deficit was dissolved from the year 2003-04 to the year 2007-08 except the year 2005-06. It was 2.78 percent during the year 2011-12. After 1991-92, primary deficit has declined much due to the rising interest payment and to some extent a decline in fiscal deficit. Revenue deficit was incurred in the period 1971-72 and 1972-73. It was 0.57 percent in 1979-80, after that it increased to 3.26 percent in 1990-91. It reached maximum of 5.25 percent of GDP in 2009-10. The average of revenue deficit as a percentage of GDP in 1980s, 1990s and 2000s has been 1.72 percent, 3.02 percent and 3.40

percent respectively. It was 4.46 percent of GDP during the period 2011-12.

Gross Fiscal Deficit and Growth Rate of Gross Domestic product:As it is clear from the figure-2, Indias economic growth rate has been plotted against this GFD to GDP ratio for the period 1970-71 to 2011-12. It is seen that the rate of growth is lower when the GFD-GDP ratio of the Central government is high. This implies higher fiscal deficit may be detrimental for the Indian economy. This simple trend analysis is not sufficient for any valid inference. Therefore the study has used the advanced econometric technique.

In this paper, Section I is the introduction, while Section II discusses the theoretical issues and empirical literature on fiscal deficit and economic growth. Section III presents the research questions, objectives, data source and the methodology used in this study. Section IV analyses the empirical results and interpretations and Section V concludes with a summary of the study and recommendations.

CAUSES FOR FISCAL DEFICIT IN INDIA:

Fiscal deficits have appeared as a constant feature in the fiscal scenario. Fiscal deficit is defined as excess of public expenditure over public revenues (excluding money received from borrowings).Ideally it should be not more than 3% of GDP. India has hardly been able to restrain its fiscal deficit to this target. Persistent fiscal deficits have raised concerns for government and economists alike.

A variety of reasons have contributed to Indias soaring fiscal deficit. Rising crude oil imports together with upward trending oil prices has added to India woes. India is almost totally dependent on imports for its crude oil requirements and a major chunk of it comes from Middle-East. Oil import bill creates considerable burden on government exchequer. Demand for gold has created fresh troubles. Sky rocketing demand for gold has facilitated poor performance of rupee vies-a-vis US dollar. Weakening rupee is a result of wide fiscal deficit. Fiscal deficit is more likely to increase further keeping in mind the upcoming Lok Sabha elections in 2014. Government may falter from its commitment to fiscal prudence in order to pursue populist policies to position electoral mandate in its favour. Though fiscal expansion might augment aggregate demand facilitating recovery. Tackling fiscal deficits is a mammoth task. Fiscal deficits if financed through market borrowings can crowd out private investments. If financed through monetary expansion, can trigger inflation. Monetary expansion drives down interest rates which paves way for inflation. Also, high and persistent deficits can lead to unsustainable debt dynamics. To tackle fiscal deficits, government needs clamp down heavily on its expenditures especially subsidies. There is also a need for raising revenues. One way of raising revenues is through tax, other through exports. Rising exchange rate seems to augment Indian exports but currency depreciation does not readily translate into exports. It is because exports not only depend on exchange rate but also purchasing power. Purchasing power in countries who are importers of Indian goods have seen steady decline due to the recession and slow recovery. Therefore, in order to increase its exports, India needs to diversify its export base. Exports are important also because they are an important part of current account. But the picture is all not so gloomy. Forecast of normal monsoon makes us hopeful of higher agricultural growth. Also, oil prices are expected to soften in coming months owing to sustainable additions to capacity and new discoveries. India registered a fiscal deficit of 4.89% of GDP in 2012-13 as against the estimate of 5.2%. So India seems to be restraining itself within targets but it must not relax and must continue to exercise fiscal restraint as possibility. Advance Taxes Are Not Enough December, was when corporate (and individuals) pay another chunk of advance tax. This should have bolstered government revenues, but it seemingly has not. Total tax revenue in

December, net of what was paid to the states, was Rs 99,944 cores, just 5.3% above the previous year. For the April to December time period, tax collections are just 7.5% higher. Consider that India's Gross Domestic Product has grown 16% in "nominal" terms that is, before inflation is removed. Government tax revenue should grow at the nominal rate (at least), but increasing inflation has eaten substantially into profits and thus, to taxes. Meanwhile, government expenditure is growing at nearly 14%. No wonder the deficit is now at Rs 3.8 lakh crore, which is already more than 90% of the budgeted deficit for the entire year. Lower Corporate Profits Analyzing the December quarter results which are being announced now tells us that corporate profits, from the 400 top companies, have fallen 1.5% from the same quarter a year back. The September quarter was also a declining number. While revenues have grown 26%, expenses have grown even more at 32%. A lower corporate profit number doesn't just cut directly from government revenues, it makes valuations of their stocks lower (and the government owns a large chunk of PSUs). The Lack of Enough Non-Tax Revenue Last year, a bulk of non-tax revenue came from selling the 3G and BWA spectrum. This year the government expected to sell equity stakes in public sector companies like ONGC and BHEL, which has not yet happened largely because the government believes the market prices are too low. The government has tried innovative means of revenue. It has asked government owned companies to their shares with their surplus cash. Nearly 30,000 cr. worth shares of large companies like L&T and Axis bank lie with SUUTI, a special purpose vehicle that was created when US-64, a mutual fund, was bailed out by the government. These could be sold, but prices will drop if the news is public, so the idea is to sell the shares into another SPV and use accounting magic to make the non-tax number. The most innovative, perhaps, was to attempt to charge Vodafone with an income tax order of more than 8,000 cr. after they bought the telecom company, Hutch; the Supreme Court has since ruled against the government. Bailouts and Oil Subsidies While expenses are up 14%, they don't include certain large ticket items. The oil deficit the under-recovery because we price diesel, LPG and kerosene below market prices is

now 97,000 crores, and is likely to grow to about 125,000 crores. A good portion of that will have to be financed by the central government. There is an increase in the acquisition prices of food from farmers, there's more fertilizer subsidy, increase in payments to NREGA, and so on. For the last quarter, there are also bailouts of Air India, additional capital to the public sector banks and the whole election process to keep expenses higher. Borrowing Impact: Credit and Inflation After all, what the government can't earn, it will borrow from the markets. What it can't even borrow, the RBI will print. The RBI is using Open Market Operations to buy bonds on the same day the government is issuing new ones effectively printing money to fund the deficit. The often stated problem is that money-printing at this level will stoke inflation. Effectively, to fund a deficit of 600,000 crores, the RBI might need to print 200,000 crores. That is an increase of nearly 15% in our money supply, and if you add another 10-12% from other ways, we'll be expanding money supply by one-fourth every year, a sure shot recipe for higher prices as the money chases the same goods.

Those other countries would love some inflation but we're dealing with a lot of it, with inflation in double digits as recently as October. Germany and Zimbabwe have seen events of hyperinflation, when inflation was more than 100% a day. That was largely because of the unlimited printing of currency, and the inflationary spiral acts very fast if you cross a boundary. The RBI's actions may "bailout" the government borrowing programme today, but given that they have a strong stance against inflation, RBI is equally likely to increase rates or take up other measures if inflation goes back into double digits.

Increased borrowing also crowds out private credit if the financiers can lend to the government at a good enough rates, they won't lend to you and me. And eventually, we are a private led economy (the government is less than 25% of our GDP) so the lack of private growth will hurt everyone. High deficits are unsustainable, as Greece and Portugal are finding out. Regardless of how things might seem, and other news that seem to be grabbing headlines, now is the time for tough decisions. We may need to increase taxes, reduce expenses or find alternate sources of government revenue. We may need to forego some of the populist measures our government pushed down our collective throats.

Indian Government Borrowings:

Public Debt Internal Debt External Debt Upto Sep 11 2935618 340750 Upto Jun 11 2816693 312280 % of Total Debt 76.06% 8.83%

The considerable point is, rupees fall could be a can of worm for the Indian companies, since they borrow money from low-cost capital supplying countries like Japan, the United States, the United Kingdom and the Euro zone to meet their funding requirements for working capital, project expansion and capital expenditures. As per latest data, the Indian companies net outstanding of offshore commercial borrowings is almost 30 per cent of the total external debt, up from 27 per cent in 2010, facing the biggest currency translation risk due to currencys movement. This lion share of external debt could even rise further due to valuation effect. On the other side, trade deficit will become a cumbersome since Indias biggest supplier is Saudi Arabia, which exports $20 billion worth of crude oil annually and rise in USD will make imports expensive. One side, we understand that the imports are getting expensive and widen the trade deficit, but on the other side, exports will become cheaper for the Indian suppliers too. Indias exports are not a bottom-rung which does not attract any buyers... Trade gap was fallen down to $2.6 billion in Dec 2010, it is indeed the trade gap widened to $20 billion in this fiscal largely due to higher oil imports, but this is a temporary movement. Subsequently, the richness of exports value could offset the imports losses.

Indias public debt:

In the last two years, Indias public debt has been limited to a range of 75 percent to 80 per cent of the total economy and the annual growth in public debt has also come down to below 10.0 per cent. To discuss the issue of public debt, VMW has gone through the 11th fiveyear plan, a document which is a facet of the governments action plan. Perhaps, none of the five-year plans have been accomplished so far and this time around the government is still not able to meet the infrastructure goal due to funding deficit. According to the Planning commission, 8.37 per cent of the total GDP is supposed to be invested in the infrastructure development. However, the government has proposed to invest only 4.0 per cent of the total GDP. Based on these assumptions, the government borrowing is expected to continue to rise amid shortfall of investments in the required sectors of the economy. Apparently, the

infrastructure in India is a bottleneck to the economic growth and the local firms are not able to realize the economy of scale.

IMF concerned about Indias fiscal deficit:

The International Monetary Fund (IMF) expressed concern about Indias large fiscal deficit and debt, and urged the government to implement reforms to achieve economic goals. In its annual review of the Indian economy, the Washington-based lender yesterday said Indias fiscal deficit among the largest in the world left little room for economic stimulus and could jeopardize economic growth. The Indian economy is expected to grow 5.4 per cent this year, up from 4.0 per cent last year, the fund said. Prices are expected to rise, with inflation growing 4.3 per cent in 2002, up from 3.8 per cent last year. Despite major economic improvements in the 1990s, which led to one of the highest rates of economic growth in the world over the past 10 years, low inflation and reduced poverty, growth in India could suffer if the fiscal situation is not addressed, the fund said. It said major policy challenges lay ahead for the worlds largest democracy. The fund

said fiscal consolidation and structural reforms were essential to ensure that India reaches its 8 per cent growth target. The governments debt, which stands at over 80 per cent of gross domestic product, was also a source of concern for the IMF.

GDP, GNP and NDP:

GDP, GNP and NDP are 3 terms used to denote national productivity. India uses GDP whereas US uses GNP. GDP is the measure of output of a given country's economy. (The term GDI or Gross domestic income is also used in some cases). It is defined as the total market value of all the goods and services produced within the country in a given period of time which is generally a fiscal year.

The GDP numerically is defined as = (C + I + G + X - M) Where, C = the consumption of the economy I = investment made by any business or households in acquiring capital G = Sum of Govt. expenditures on final goods and services X = Exports M = Imports.

It is to be noted that buying a financial product is termed as savings and not an investment like those of buying of stocks and shares and consequently these are excluded from the GDP. But if money is converted into goods or services it is included. Value of goods and services are imputed if they cannot be calculated accurately. An example is that of using ones own flat/house to stay during a fiscal year. Since staying in a flat/house is a service that is taken an equivalent value of the rent is rationally charged to what the person would be paying in case he did not have his/her own house and added to the GDP. Similar rationale can be put forward by travelling in one's own car. These all factors should ideally be added to the GDP. However to transfer gifts/money from my account to my dad's that would not account for GDP since no corresponding service acts as the underlying.

GNP = GDP (+) total capital gains from overseas investment (-) income earned by foreign nationals domestically.

In other words GNP = GNP = GDP + NR (Net income from assets abroad (Net Income Receipts))

So, GDP measures the strength of the country's local economy whereas GNP is used to determine how the foreign nationals of the country are faring too. It measures Total value of Goods and Services produced by all nationals of a country.

NDP stands for Net domestic product. The term is not used extensively used. The net domestic product (NDP) = [(GDP) - depreciation on a country's capital goods]. This is an estimate of how much the country has to spend to maintain the current GDP. If the country is not able to replace the capital stock lost through depreciation, then GDP will fall. In addition, a growing gap between GDP and NDP indicates increasing obsolescence of capital goods, while a narrowing gap would mean that the condition of capital stock in the country is improving.

The damages of high fiscal deficit in the Indian scenario:

The conditions in the US and India are not comparable, except for the fact that both are running unsustainable levels of deficit. However, the ill effects of running high deficit are far more visible in India and the need for correction is a lot more urgent here. Apart from the threat of a ratings downgrade, high fiscal deficit is the source of most of the problems that the Indian economy is facing today. Higher deficit since FY09 and higher borrowing has resulted in lower savings and lower growth in the economy. In FY09, at the gross level, fiscal deficit jumped to about 6% of the GDP compared with 2.5% in the previous year. In absolute terms, the deficit went up by about 2.6 times and has grown significantly since then and crossed Rs.5 trillion levels in the last financial year. Let us assume that the government deficit was contained at around Rs.2 trillion, leaving Rs.3 trillion in the banking system to lend to the productive sector. Naturally, the cost of money would have been lower and production and growth would have been higher. It is no coincidence that high growth years, up till FY08, saw lower deficit, which even declined in absolute terms. Higher deficit, as argued by neo-classical economists, also results in decline in savings ratethe gross domestic savings has declined from the level of 36.8% of the GDP in FY08 to 32% in FY12. Inflation has also been sticky and has remained way above the comfort level, simply because of the demand push being generated by higher government

expenditure. Further, higher demand is getting leaked to the outside world and is not allowing imports to adjust the way exports do in response to the shift in global trade. As a result, in the last fiscal, the current account deficit (CAD) swelled to a record high level of $78 billion and is not expected to come down in a hurry. CAD of this magnitude poses serious financing challenges and creates enormous uncertainty on the external front. Therefore, for a country like India with so much downside risk, it is important that government finances are kept under control.

Conclusion: