The Fiscal Frontier

The financial crisis of 2007-08 had a vast impact on the world economy from failing of Lehman Brothers to trembling financial indicators such as increasing fiscal deficits, falling GDP’s, falling FOREX reserves etc. every country on the globe was affected by it, some are even facing aftershocks of that crisis in 2019 also.

In continuation to that year 2020 came up with its own serious problems, this time there was no financial crisis directly but a pandemic in name of "COVID-19", which has forced the world to go into another financial crisis despite of strong results shown on account of trade volume, demand, reserves, tourism in the past years as a sign of recovery.

The purpose of any government is to earn revenue to cover its expenditure & show profit, but because of major commitments of government with respect to defense, infrastructure, subsidies, & various other works government always remain short of funds. Expenditure include various types of developmental expenditure (such as health, education, industry & minerals, power irrigation & flood control, transport, railways, loans & advances, grants, general economic services, food & fertilizer subsidy), Non-developmental expenditure ( such as interest payments, defense, fiscal services, police, pension & other retirements, GST compensations, economic cooperation with other countries & various other miscellaneous expenditure.

On the revenue side in country like India where tax revenue is low amid GST, Income Tax, Custom etc.. It is witnessed that more than 3 cr. people travel through air, but when come to pay tax only 1.5 cr. people do the same on a population base of 135 cr. Revenue to government consist of tax revenue, capital receipts ( such as loans received from foreign Governments and bodies, disinvestment receipts and recoveries of loans from State and Union Territory Governments and other parties ) & other revenues.

On the other hand, Fiscal Deficit means, “Shortfall in government revenue in comparison to its expenditure” & Primary deficit means, “Primary deficit is defined as fiscal deficit of current year minus interest payments on previous borrowings”. This is the reason why primary deficit operates below fiscal deficit with difference counting as interest payments. In the recent trend (As shown in image 1.3) it can be seen that due to various efforts of government India’s is bringing down its fiscal deficit but with sudden blow such as COVID-19 it will be difficult to do the same.

In the event horizon of 2007-08 crisis it can be seen that there was a sharp increase in the fiscal deficit just after the global recession took place (As shown in image 1.4 ) with same trend as follow this time in 2020 this curve will be even more steep as in comparison to the 2008. It was difficult to attain fiscal deficit level of 2008 till 2019 but now it seems as an impossible job for few years.

In 2020 there is a complete shutdown in most part of the worlds with no revenue despite of high demand just before virus attach on the world. In the changing demography’s of the world tourism sector has been identified as primary & secondary sector of revenue for most of the countries since it s badly affected revenues for tourism centered countries goes to a half for a undefined period. Also with a halt to export & import manufacturing sector including retail will be seen with a sluggish growth in the coming times.

The gap between linear gross fiscal deficit & linear gross primary deficit in increasing every this which is payments for interest, the same can be seen in image 1.5 where interest payments are on a upper side trend & in the coming times with revenue targets difficult to meet this gap will increase further to a high level if not managed properly. Now, it is the duty of the government to introduce India such a stimulus in finance to tackle the situation in order to put economy back on track.

Data Source: Reserve Bank of India