Fiscal deficit refers to the total borrowings of the government, taken to build the gap between its earnings and expenses. Revenue deficit is the gap between recurring revenue and recurring / short term expenses. A high revenue deficit can affect the administrative and day to day activities of the government while a high Fiscal deficit can make a country bankrupt. India’s Fiscal deficit stands above 5% at 12 lakh crore of absolute deficit and revenue deficit is above 3% with 6 lakh crore. The government can reduce FD and RD while maintaining enough money for development by taking the below steps-
India’s non-crude imports stand at an average of USD 20 billion per month. It can reduce a majority of these imports by increasing self-reliance and domestic investment in areas like solar energy. This will reduce deficit while increasing investment and growth in the economy.
Due to Covid-19, there is a global anti-china sentiment. If India wants to start the cycle of investment and growth, it needs to replace china as the next manufacturing powerhouse by reforming its ease of doing business policies. Presently, China stands first in global exports at USD 2600 billion.
The banking and financial system needs an overhaul to improve financial inclusion and penetration so that idle money can enter the financial system and contribute towards productive asset creation. This will reduce requirement of government funds and increase dependency on the market for funds.
India’s tax base presently stands at 1.5 crore taxpayers out of 130 crore citizens i.e. 1 percent of population. 3% of working adults (25-65 years) pay income taxes. In china, 25% of working adults pay taxes. We can increase revenues and reduce deficit by bringing in more tax evading citizens into the tax net. The tax base can be increased by simplifying tax laws and encouraging people to file taxes.
Unproductive and irrational subsidies by the government increase deficits but do not contribute towards future development. The government can replace all irrational subsidies with Direct Benefit transfer (DBT) and more productive subsidies.
MGNREGA is an employment cum development scheme which contributes towards creation of capital assets. More such schemes can help in transforming the subsidy structure of the country.
A more market based economy, where people are able and willing to consume and invest, free of intervention by the state, can achieve the twin objectives of reducing fiscal deficit and increasing investment for development and growth
Note:
The average per capita income of Indians is Rs 1.4 lakh and minimum tax threshold is Rs 5 lakh. In most countries, income tax threshold is below per capita income. India is an outlier.