{"id":27957,"date":"2022-07-26T16:29:52","date_gmt":"2022-07-26T16:29:52","guid":{"rendered":"https://www.5paisa.com/finschool/?p=27957"},"modified":"2025-03-26T16:15:29","modified_gmt":"2025-03-26T10:45:29","slug":"government-aims-to-avoid-fiscal-slippage","status":"publish","type":"post","link":"https://www.5paisa.com/finschool/government-aims-to-avoid-fiscal-slippage/","title":{"rendered":"Government Aims To Avoid Fiscal Slippage"},"content":{"rendered":"\u003cdiv data-elementor-type=\u0022wp-post\u0022 data-elementor-id=\u002227957\u0022 class=\u0022elementor elementor-27957\u0022\u003e\u003csection class=\u0022elementor-section elementor-top-section elementor-element elementor-element-993586f elementor-section-boxed elementor-section-height-default elementor-section-height-default\u0022 data-id=\u0022993586f\u0022 data-element_type=\u0022section\u0022\u003e\u003cdiv class=\u0022elementor-container elementor-column-gap-default\u0022\u003e\u003cdiv class=\u0022elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-09a8c58\u0022 data-id=\u002209a8c58\u0022 data-element_type=\u0022column\u0022\u003e\u003cdiv class=\u0022elementor-widget-wrap elementor-element-populated\u0022\u003e\u003cdiv class=\u0022elementor-element elementor-element-a7ab6e6 elementor-widget elementor-widget-text-editor\u0022 data-id=\u0022a7ab6e6\u0022 data-element_type=\u0022widget\u0022 data-widget_type=\u0022text-editor.default\u0022\u003e\u003cdiv class=\u0022elementor-widget-container\u0022\u003e\u003cp\u003eThe Government of India has aimed to closely watch on the spending in order to complement RBI’s measures for controlling inflation and manage external account amid capital outflows. In February 2022, Prime Minister Narendra Modi’s Government Set a fiscal deficit target of 6.4% of Gross Domestic Product compared to 6.7% last year.\u003c/p\u003e\u003ch6\u003e\u003cspan style=\u0022color: #000080;\u0022\u003e\u003cstrong\u003eBefore we get in to the topic lets discuss what is Fiscal Slippage?\u003c/strong\u003e\u003c/span\u003e\u003c/h6\u003e\u003cul\u003e\u003cli\u003eFiscal Slippage in simple terms is any deviation in expenditure from the expected. For example let’s say a trader wishes to buy a certain stock at Rs.10 and 1000 in number.\u003c/li\u003e\u003cli\u003eIn this case there are market forces such as demand and supply involved i.e. Liquidity in the stock or volumes traded in it as well as the intermediaries in the chain.\u003c/li\u003e\u003cli\u003eSo, there is likely a chance that the trader is able to secure some of the outstanding shares of the company say 500 at Rs.10 while secure the remaining at Rs.15 due to intermediaries who influence the price of a stock to a significant degree.\u003c/li\u003e\u003cli\u003eThis is what is referred to as fiscal slippage. On a larger level, say the central government when the government\u0026#8217;s expenditure surpasses the expected or estimated levels it is the fiscal slippage threat that the country then reels in.\u003c/li\u003e\u003c/ul\u003e\u003cp\u003e\u003cspan style=\u0022color: #000080;\u0022\u003e\u003cstrong\u003eWhat is Fiscal Deficit?\u003c/strong\u003e\u003c/span\u003e\u003c/p\u003e\u003cul\u003e\u003cli\u003eFiscal deficit, the condition when the expenditure of the government exceeds its revenue in a year, is the difference between the two.\u003c/li\u003e\u003cli\u003eFiscal deficit is calculated both in absolute terms and as a percentage of the country’s gross domestic product (GDP).\u003c/li\u003e\u003cli\u003eThe fiscal deficit of a country is calculated as a percentage of its GDP or simply as the total money spent by the government in excess of its income.\u003c/li\u003e\u003cli\u003eIn either case, the income figure includes only taxes and other revenues and excludes money borrowed to make up the shortfall.\u003c/li\u003e\u003c/ul\u003e\u003cp\u003e\u003cspan style=\u0022color: #000080;\u0022\u003e\u003cstrong\u003eHow is fiscal deficit balanced out?\u003c/strong\u003e\u003c/span\u003e\u003c/p\u003e\u003cul\u003e\u003cli\u003eWhile a rising deficit is a challenge for the government in the long term, to balance it out in short-term macroeconomics, the government looks at market borrowings by issuing bonds and selling them in through banks.\u003c/li\u003e\u003cli\u003eBanks buy these bonds with currency deposits and then sell them to investors.\u003c/li\u003e\u003cli\u003eGovernment bonds are considered an extremely safe investment instrument, so the interest rate paid on loans to the government represents risk-free investment.\u003c/li\u003e\u003cli\u003eThe government also sees a deficit situation as an opportunity to expand policies and schemes, including welfare programmes, without having to raise taxes or cut spending in the Budget.\u003c/li\u003e\u003c/ul\u003e\u003cp\u003e\u003cspan style=\u0022color: #000080;\u0022\u003e\u003cstrong\u003eInflation and India\u003c/strong\u003e\u003c/span\u003e\u003c/p\u003e\u003cul\u003e\u003cli\u003eSurging costs forced India in May to cut fuel taxes and change duty structures hitting revenues by $ 19.6 billion while additional fertilizer subsidies lifted expenditure.\u003c/li\u003e\u003cli\u003eThe Government and central bank have scrambled to contain prices through fiscal measures and monetary tightening after inflation jumped to multi year high.\u003c/li\u003e\u003cli\u003eRetail Inflation has held above the Reserve Bank of India 6% mandated ceiling for five straight months while wholesale price inflation has risen to 30 year highs.\u003c/li\u003e\u003cli\u003eThe fiscal deficit for FY23 is seen at ₹16.6 lakh crore, or 6.4% of GDP. The government faces a spike in food and fertilizer subsidies and had to reinstate support for cooking gas to shield consumers.\u003c/li\u003e\u003cli\u003eOn the revenue side, it took a hit due to the cut in excise on petrol and diesel to reduce soaring fuel retail prices. The higher expenditure and lower revenue had raised concerns that the fiscal slippage could stoke inflation, undermining efforts by the RBI.\u003c/li\u003e\u003cli\u003eConsumer inflation has eased from the eight-year peak of 7.8% in April to 7% in June but has stayed outside RBI\u0026#8217;s 2-6% target range for six consecutive months.\u003c/li\u003e\u003c/ul\u003e\u003cp\u003e\u003cstrong\u003e\u003cspan style=\u0022color: #000080;\u0022\u003eHow Inflation has effected India?\u003c/span\u003e\u003c/strong\u003e\u003c/p\u003e\u003cul\u003e\u003cli\u003eThe war between Russia and Ukraine has caused a disruption in global supply chain, thereby pushing up prices of crude oil and other commodities. The spillover effect is now being felt by all economies of the world.\u003c/li\u003e\u003cli\u003eAll this at a time when economies are trying to put behind the slump induced by the Covid pandemic and are gradually trying to increase the pace of growth. Crude oil prices had mostly been on rise in March, after Russia started the invasion of Ukraine on February 24.\u003c/li\u003e\u003cli\u003eOil companies in India had begun passing on the high import cost of global crude oil prices by hiking domestic petrol and diesel prices from March 22 \u0026#8212; after a four-and-half-month long hiatus.\u003c/li\u003e\u003cli\u003eBesides, domestic cooking gas (LPG) prices were also hiked during the month.\u003cbr /\u003eIndia is dependent on imports to meet 85 per cent of its oil needs and so retail rates adjust accordingly to the global movement.\u003c/li\u003e\u003cli\u003eIn March, inflation in crude petroleum spiked to 83.56 per cent, from 55.17 per cent during February.\u003c/li\u003e\u003c/ul\u003e\u003cp\u003e\u003cspan style=\u0022color: #000080;\u0022\u003e\u003cstrong\u003eImpact on households\u003c/strong\u003e\u003c/span\u003e\u003c/p\u003e\u003cul\u003e\u003cli\u003eAs producers grapple with high input costs, firms have started passing on higher prices to consumers.\u003c/li\u003e\u003cli\u003eRising input costs for products such as fuel, metals and chemicals have pushed up wholesale prices, a proxy for producer prices and are adding to pressure on retail prices.\u003c/li\u003e\u003cli\u003eHowever, the impact of rising inflation will vary widely across households owing to the difference in consumption patterns.\u003c/li\u003e\u003cli\u003eIn the past few months, prices of almost all essential items have seen a surge, thereby forcing the common man to revisit his/her household budget.\u003c/li\u003e\u003cli\u003eThe spillover effect of soaring fuel prices has in effect made transportation expensive.\u003c/li\u003e\u003cli\u003eThis has added to the woes of people who now buy their regular food items at a much higher price than a year ago.\u003c/li\u003e\u003c/ul\u003e\u003cp\u003e\u003cspan style=\u0022color: #000080;\u0022\u003e\u003cstrong\u003eSoaring prices = Fall in savings\u003c/strong\u003e\u003c/span\u003e\u003c/p\u003e\u003cul\u003e\u003cli\u003eApart from prices of staples, households will also feel the pinch if RBI indeed opts to raise interest rates in the near future.\u003c/li\u003e\u003cli\u003eIf at all the central bank opts to hike interest rates, it will put an upward pressure on a household\u0026#8217;s monthly expenditure as the amount of equated monthly instalments (EMI) that people pay for loans will rise.\u003c/li\u003e\u003cli\u003eTo be clear, let us explain this via the following example:\u003c/li\u003e\u003cli\u003eAssume a person is paying an interest of 7 per cent on a principal amount of Rs 50 lakh for a tenure of 20 years. The EMI amount comes out to be Rs 38,765.\u003c/li\u003e\u003cli\u003eNow, if RBI raises rates by 50 basis points (bps) to 7.5 per cent, the EMI amount shoots up to Rs 40,280.\u003c/li\u003e\u003cli\u003eIn case of a rise of 100 bps to 8 per cent, it amounts to Rs 41,822.\u003c/li\u003e\u003c/ul\u003e\u003cp\u003e\u003cspan style=\u0022color: #000080;\u0022\u003e\u003cstrong\u003eWays to manage fiscal slippages in Economy\u003c/strong\u003e\u003c/span\u003e\u003c/p\u003e\u003cul\u003e\u003cli\u003eExpenditure should be done as far as possible in line with planned and judiciously such that it is not faltered at very widely.\u003c/li\u003e\u003cli\u003eDisinvestment is another way out to come out of the slippage.\u003c/li\u003e\u003cli\u003eProceeds from revenue collection to be used towards promoting economic sectors and in turn create jobs and likewise enhanced production and consumption.\u003c/li\u003e\u003cli\u003eSubsidy cut down to judicious level.\u003c/li\u003e\u003cli\u003eTax mechanism should also be such that it does not create any kind of fear while settling their tax dues.\u003c/li\u003e\u003c/ul\u003e\u003ch6\u003e\u003cspan style=\u0022color: #000080;\u0022\u003e\u003cstrong\u003eExpenditure Control Measures by Government\u003c/strong\u003e\u003c/span\u003e\u003c/h6\u003e\u003cul\u003e\u003cli\u003eThe government decided to cut part of excise duty levied on petrol and diesel.\u003c/li\u003e\u003cli\u003e This reduction is estimated to bring down revenue collection by ₹1-lakh crore.\u003c/li\u003e\u003cli\u003eAt the same time, subsidy on fertilizer has been raised by ₹1.10-lakh crore to ₹2.15-lakh crore.\u003c/li\u003e\u003cli\u003eAll these are expected to have an effect on the fiscal deficit, indicated a monthly economic review (MER) prepared by the Economic Affairs Department of Finance Ministry.\u003c/li\u003e\u003cli\u003eAs government revenues take a hit following cuts in excise duties on diesel and petrol, an upside risk to the budgeted level of gross fiscal deficit has emerged.\u003c/li\u003e\u003cli\u003eIncrease in the fiscal deficit may cause the current account deficit to widen, compounding the effect of costlier imports, and weakening the value of rupee, thereby further aggravating external imbalances, creating the risk of a cycle of wider deficits and a weaker currency.\u003c/li\u003e\u003cli\u003eRationalizing non-capex expenditure has thus become critical, not only for protecting growth supportive capex, but also for avoiding fiscal slippages\u003c/li\u003e\u003cli\u003eThe budget prescribed an expenditure of over ₹39.44-lakh crore, out of which capital expenditure has been estimated at over ₹7.50-lakh crore, while the remaining ₹32-lakh crore is revenue expenditure.\u003c/li\u003e\u003c/ul\u003e\u003cp\u003e\u003cspan style=\u0022color: #000080;\u0022\u003e\u003cstrong\u003eChallenges\u003c/strong\u003e\u003c/span\u003e\u003c/p\u003e\u003cul\u003e\u003cli\u003eIndia faces near-term challenges in managing its fiscal deficit, sustaining economic growth, reining in inflation and containing the current account deficit while maintaining a fair value of the Indian currency.\u003c/li\u003e\u003cli\u003eMany countries around the world, including and especially developed countries, face similar challenges.\u003c/li\u003e\u003cli\u003eIndia is relatively better placed to weather these challenges because of its financial sector stability and its vaccination success in enabling the economy to open up.\u003c/li\u003e\u003cli\u003eIndia’s medium-term growth prospects remain bright as pent-up capacity expansion in the private sector is expected to drive capital formation and employment generation for the rest of this decade.\u003c/li\u003e\u003cli\u003eNear-term challenges need to be managed carefully without sacrificing the hard-earned macroeconomic stability\u003c/li\u003e\u003cli\u003eIn the medium term, the successful launch of the Production Linked Incentive (PLI) scheme, development of renewable sources of energy while diversifying import dependence on crude oil and strengthening of financial sector are expected to drive economic growth.\u003c/li\u003e\u003c/ul\u003e\u003cp\u003e\u003cspan style=\u0022color: #000080;\u0022\u003e\u003cstrong\u003eBalancing Acts\u003c/strong\u003e\u003c/span\u003e\u003c/p\u003e\u003cul\u003e\u003cli\u003eThe high-wire balancing act between maintaining growth momentum, restraining inflation, keeping the fiscal deficit within budget and ensuring a gradual evolution of the exchange rate in line with underlying external fundamentals of the economy is the challenge for policymaking this financial year.\u003c/li\u003e\u003cli\u003eSuccessfully pulling it off will require prioritizing macroeconomic stability over a near-term growth. The reward for such a policy discipline will be the availability of adequate domestic and foreign capital to finance India’s investment needs and economic growth that fulfil the employment and quality of life aspirations of millions of Indians.\u003c/li\u003e\u003c/ul\u003e\u003cp\u003e\u003cspan style=\u0022color: #000080;\u0022\u003e\u003cstrong\u003eConclusion\u003c/strong\u003e\u003c/span\u003e\u003c/p\u003e\u003cul\u003e\u003cli\u003eWith the current FY likely to end with FD of 7.4 percent \u0026#8211; against the target of 6.4 percent \u0026#8211; the government won’t be able to stick to even this substantially relaxed fiscal trajectory.\u003c/li\u003e\u003cli\u003eThis is dangerous as it will lead to an increase in Centre’s debt to unsustainable levels. Already, it has climbed to 62 percent of GDP against 46 percent set by Singh committee The Government should make efforts to avoid this horrendous scenario.\u003c/li\u003e\u003cli\u003eEven as Modi dispensation is doing its best to increase tax collection and the momentum should be maintained, there is an urgent need to rein in\u003c/li\u003e\u003cli\u003eExpenses, particularly on welfare schemes. Here, substantial savings are possible by restricting coverage, cutting costs, improving efficiency and minimizing leakages.\u003c/li\u003e\u003c/ul\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/section\u003e\u003c/div\u003e","protected":false},"excerpt":{"rendered":"\u003cp\u003eThe Government of India has aimed to closely watch on the spending in order to complement RBI’s measures for controlling inflation and manage external account amid capital outflows. In February 2022, Prime Minister Narendra Modi’s Government Set a fiscal deficit target of 6.4% of Gross Domestic Product compared to 6.7% last year. Before we get … \u003ca title=\u0022Government Aims To Avoid Fiscal Slippage\u0022 class=\u0022read-more\u0022 href=\u0022https://www.5paisa.com/gujarati/finschool/government-aims-to-avoid-fiscal-slippage/\u0022 aria-label=\u0022Read more about Government Aims To Avoid Fiscal Slippage\u0022\u003eRead more\u003c/a\u003e\u003c/p\u003e","protected":false},"author":1,"featured_media":28080,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[17],"tags":[],"class_list":["post-27957","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-whats-brewing"],"acf":[],"_links":{"self":[{"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/posts/27957","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/posts"}],"about":[{"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/types/post"}],"author":[{"embeddable":true,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/users/1"}],"replies":[{"embeddable":true,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/comments?post=27957"}],"version-history":[{"count":31,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/posts/27957/revisions"}],"predecessor-version":[{"id":68625,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/posts/27957/revisions/68625"}],"wp:featuredmedia":[{"embeddable":true,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/media/28080"}],"wp:attachment":[{"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/media?parent=27957"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/categories?post=27957"},{"taxonomy":"post_tag","embeddable":true,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/tags?post=27957"}],"curies":[{"name":"wp","href":"https://api.w.org/{rel}","templated":true}]}}