Introduction

Fiscal deficits have been a worry for the Indian economy for over two decades. The initial budget making years focussed on a planned model of economic growth, and capital expenditures out of the government budget were used largely for plan expenditure. The focus was much more on revenue deficit figures, that is, the difference between revenue receipts and revenue expenditure. The austerity models of the early political leaders and a socialist model of growth led to a focus on high levels of personal taxation, barriers to imports, an import substitution model of growth, and reliance on the public sector for economic growth. In this model, public finances were a tool for capital formation, aided by funds from the banking sector that had been substantially nationalized by the early seventies.

Towards the second half of the seventies, and subsequently thereafter, expenditure on social sectors started to grow both at the state and central levels. Government increasingly found it necessary to borrow to maintain the infrastructure for schools, hospitals and water supply that it had funded. Government borrowing was used not just for capital funding, but also for revenue expenditure gaps. At about this time, the role of subsidies in expenditure started increasing. The food grains procurement and distribution programmes devolved substantial expenditure on to the central government budget starting from wheat, and then rice, procurement operations. Fertilizer subsidies increased after the Green Revolution initiatives focussed on fertilizer application as an important production input. Finally, the change in fuel pricing policies after the 1973–1974 oil price shock added a big burden to the budgets in the form of fuel and energy subsidies. Figures 3.1 and 3.2 trace the growth in fiscal deficits from 1992 at the centre and state level (Ministry of Finance).

The year 2008–2009 represents an inflection point in the fiscal deficit strategy of the central government. In that year, fiscal expansion increased the fiscal deficit from Rs. 126,912 crores to Rs. 336,992 crores, from 2.54 per cent of gross domestic product (GDP) to 5.99 per cent. It was argued by government that, this fiscal expansion was required to cushion the economy from the impact of the global financial crisis of 2008.