Page 253 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes Pay Commission recommendations and Agriculture Debt Waiver and Debt Relief
Scheme for Farmers contributed to the higher fiscal deficit of 6 per cent of GDP
in RE 2008-09 as compared to 2.5 per cent of GDP in B.E. 2008-09.
4. The Country is facing difficult economic situation, the cause of which is not
emanating from within its boundaries. However, left unattended, the impact of
this crisis is going to affect us in medium to long-term.
The Government had two policy options before it. In view of falling buoyancy
in tax receipts, the Government could have taken a decision to cut expenditure
and thereby live within the estimated deficit for the year.

The second option was to increase public expenditure, even with reduced receipts,
to stimulate economy by creating demand and maintain the growth trajectory
which the country was witnessing in the recent past.

The Government took the second option of adopting fiscal measures to increase
public expenditure to boost demand and increase investment in infrastructure
sector.
Ensuring revival of the higher growth of the economy will restore revenue
buoyancy in medium term and afford the required fiscal space to revert to the
path of fiscal consolidation.
B. Fiscal Policy for the ensuing Financial Year

5. The Interim Budget 2009-2010 is being presented in the backdrop of uncertainties
prevailing in the world economy. The impact of this is seen in the moderation of
the recent trend in growth of the Indian economy in 2008-09 which at 7.1 per cent
still however makes India the second fastest growing economy in the World.
The measures taken by Government to counter the effects of the global meltdown
on the Indian economy, have resulted in a short fall in revenues and substantial
increases in government expenditures, leading to a temporary deviation from
the fiscal consolidation path mandated under the FRBM Act during 2008-09 and
2009-2010.
The revenue deficit and fiscal deficit for R.E. 2008-09 and B.E. 2009-2010 are, as a
result, higher than the targets set under the FRBM Act and Rules.
The grounds due to which this temporary deviation has taken place, are detailed
in the Fiscal Policy Overview above and also in the Macro-economic Framework
Statement being presented in the Parliament. The fiscal policy for the year
2009-2010 will continue to be guided by the objectives of keeping the economy
on the higher growth trajectory amidst global slowdown by creating demand
through increased public expenditure in identified sectors.
However, the medium term objective will be to revert to the path of fiscal
consolidation at the earliest, with improvement in the economic situation.
Question:
Comment on the fiscal policy (only portion given in the case) introduced by the finance
minister.
Source: www.rediff.com

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