Question: The pandemic has left India at great disadvantage over its economic status especially widening of its fiscal deficit. Discuss. Highlight measures to reduce the deficit.
Answer: India’s domestic economy is facing a precarious situation where inflation is increasing but GDP growth is decreasing. This has created a situation in which the fiscal deficit has widened putting enormous pressure on government’s finances.
Reasons for widening of fiscal deficit
- Increasing imports and decreasing exports
As the economy is improving, the demand for foreign goods is increasing. But the failure of domestic industries to recover has reduced their exporting capacity. As a result, the economy has suffered a big setback.
- Low revenue
The pandemic has left many businesses to face losses. The fear in consumers has prompted a low demand for goods and services. As a result revenue sources of the government such as income tax, GST, excise tax etc have reduced.
- High government spending
With private sector reducing their spending, the government is under lot of pressure to spend in order to revive demand and growth. This has resulted in high burden of debt on government.
Measures to reduce deficit
- Increasing domestic production
The best way to revive revenues would be to revive growth in production and manufacturing. This will create jobs, increase consumer spending and also exports. The increase in public income will contribute towards tax revenues for the government.
- Higher tax to GDP ratio
Tax collection measures have to be strengthened. People indulging in fraud and tax evasion have to be identified and dues collected. Measures have to be taken to encourage people to reveal their hidden income and honest taxpayers have to be honoured.
- Raising new revenue sources
To replace the deficit in revenues, new sources have to be identified. This includes disinvestment in non-profitable ventures, exploring new profits in overseas markets, short term bonds etc. This will help in getting through tough times.
Thus, there is a need to reduce government’s unnecessary spending such as seminars and tours. In addition revenue generating sources have to be identified and implemented.