Page 141 - DMGT401Business Environment

Business Environment

Notes Total expenditure includes revenue expenditure and capital expenditure and total receipts include
revenue receipts and capital receipts. This excess of total expenditure over total revenue is called
budget deficit. It is also defined as the fiscal deficit minus government borrowing and other
liabilities (public debt receipts). This is somewhat close to the concept of monetised deficit,
which means the printing of new money by the Reserve Bank of India to part-finance the deficit.

But this conventional definition of deficit has lost relevance as it does not meet international
practice. So this concept of Budget Deficit has been given up by the government in 1997-98. Now
we follow the concept of Fiscal Deficit.

Fiscal Deficit: In simple terms, fiscal deficit is budgetary deficit plus market borrowings and
other liabilities of the Government of India. It also refers to difference between the total
expenditure and the government's total non-debt receipts.
Fiscal Deficit = Revenue Receipts (Net tax revenue + Non-tax Revenue)
+ Capital Receipts (only recoveries of loans and other receipts)
– Total Expenditure (Plan and non-plan)
OR
= Budget Deficit + Government's market borrowing and liabilities.

Primary Deficit: Primary deficit is obtained by subtracting interest payment (a component of
non Plan expenditure) from fiscal deficit. Therefore, the primary deficit is the deficit of the
current year and it is accordingly triggered by an expansionary fiscal policy during the year.
The Government of India adopted deficit financing to obtain necessary resources for development
but this may beget many problems as it increases the public debt, which increases the interest
burden of the government.

The most serious disadvantage of deficit financing is inflationary rise of prices. Deficit financing
increases the total supply of money in the country and raises the aggregate demand of goods
and services. In the absence of corresponding increase in supply of goods and services, deficit
financing leads to a rise in the level of prices. Inflation works as a forced saving or indirect
taxation on people. Because of increased prices they have to pay extra to maintain the same
standard of living.
One way for a government to finance a budget deficit is simply to print money – a policy that
leads to higher inflation. Some economists have suggested that a high level of debt might also
encourage the government to create inflation. Because most government debt is specified in
nominal terms, the real value of debt falls when the price level rises.

This is the usual redistribution between creditors and debtors caused by unexpected inflation.
Here, the debtor is the government and the creditor is the private sector. But this debtor, unlike
others, has access to the monetary printing press. A high level of debt might encourage the
government to print money, thereby raising the price level and reducing the real value of its
debts.

6.1.7 Impact of Fiscal Policy on Business

If there is any single document that has maximum impact on business, it is the Budget. Each
year's Budget brings opportunities and threats for business. Every budget improves the bottom
line of some businesses, while some businesses go into the red. The recent budget, for instance,
compelled organisations to work on their Compensation plan because of the Fringe Benefit Tax
(FBT). Similarly, the budget of year 2005 gave a big impetus to mutual funds, and in turn to the
stock market, by allowing tax rebate on investment in mutual funds. The introduction of VAT
also has a big impact on the business.

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