Effects of Liberalization

Fiscal Deficit refers to the excess of government’s expenditure over its revenue. When the government’s expenditure is exceeding the revenue , it has to borrow money or sell the assets to finance the deficit. 

Formula  

Fiscal Deficit = Total Expenditure – Total receipts ( excluding the borrowings).Thus , Fiscal Deficit is nothing but borrowing required of the government. 

During the economic crisis 1991, India saw the gross fiscal deficit as high as 12.7%. This forced India to adopt the LPG reforms 1991 , which eventually opened up the Indian market up to an extent. But the problem of high fiscal deficit continued in the post liberalisation era and was seen as a huge problem for the government’s public expenditure management. The reasons for such continued problem are the following: 

1. Exposed to the global economic shocks : With the opening up of the economy with globalisation post 1991 , the Indian market is now also vulnerable to the economic shocks which happen in the world. As we are now a part of the world supply chain any shock or disruption in the world market and world prices will affect the revenues and expenditure of the Indian government also. One classic example can be the global economic crisis of 2008 , which led to oil price rise, trade wars etc. This impacted adversely on the fiscal deficit of the country
2.  Unchecked subsidies: The subsidies which are not evenly spread throughout    the year but are given in huge amounts during the election phases, puts pressure on the expenditure of the government. Thus a regulated and systematic subsidy structure has to be formed so that the actual motive of subsidies can be realised. 
3.  Uneven tax net : With the increase in the overall GDP and the per capita income of people post liberalisation, the overall direct tax revenue collection of the government is still lagging behind. One of the reasons can be more dependence on the indirect tax collection which is regressive in nature. This regressiveness of indirect taxes makes it difficult for the government to increase its receipt collection. 

To manage the fiscal deficit problem the government has launched various schemes such as: 

1. The fiscal responsibility and the budget management act (2003) : The act sets rules and targets for the government to reduce the fiscal deficit and other deficits like the revenue deficit so as to maintain the fiscal discipline and inter- generational equity in the fiscal management.
2. Monetary policy committee (2016) : With the recommendations of the Urjit patel committee, the government established a MPC so as to adopt a flexible inflation targeting framework, which is necessary for increasing the competitiveness of Indian goods and services in the international market for better trade.

India after post liberalisation has seen a reduction in the fiscal deficit though they are still high given the economy’s size and GDP structure. Borrowing by the government is nothing but a burden for the future generations. The Bimal Jalan Committee also suggested measures like rationalising subsidies and disinvestment as a measure to enhance expenditure management.