Deficits: What we most likely to depend upon
(also we like the most)
Fiscal
deficit
1.
Revenue receipts (a+b) :
(a)Tax revenue (net of States’ (b)
Non-tax revenue
2. Revenue expenditure of which:(a)
Interest payments (b) Major subsidies (c) Defence expenditure
3.
Capital receipts of which:
(a) Recovery of loans (b) Other receipt
(mainly PSU disinvestment) (c) Borrowings and other liabilities $
4.
Capital expenditure
5. Total expenditure of which: {(a) Plan
expenditure (b) Non-plan expenditure} = Revenue expenditure + capital expenditure
Revenue deficit = 2-1( child’s play haa
haa)6. Fiscal
Deficit (FD) [5-1-3(a)-3(b)] (here Borrowings and other
liabilities i.e. 3(c) is not included it means you cannot fill the fiscal
deficit by borrowings.
7.
Primary deficit [6-2(a)]=fiscal
deficit –Interest payments
The
meaning of "deficit" differs from that of "debt", which is
an accumulation of yearly deficits. Deficits occur when a government's
expenditures exceed the revenue that it generates. The deficit can be measured
with or without including the interest payments on the debt as expenditures. The primary deficit is defined as the
difference between current government spending on goods and services
and total current revenue from all types of taxes net of transfer
payments. The total deficit (which is often called the
fiscal deficit or just the 'deficit') is the primary deficit plus interest payments on the debt. The
twin deficits are Fiscal Deficit (FD) and
Current Account Deficit (CAD- is
different from trade deficit) 1
A TRADE DEFICIT occurs when the value
of a country's imports is greater than the
value of its exports. This means that the country's balance of trade is negative. But the
question arises, in case of trade deficit, if we are exporting less means earning
less and importing more means paying more (In hard currency* i.e. Dollar here)
then where we bring the deficit money.
Explanations:
A country cannot have a trade deficit unless other countries are willing to
loan it the funds needed to finance the purchases of imports. Therefore, a
country with a trade deficit will most likely have a current account deficit
(because of the borrowings).
Trade deficit:
Positives:-
1.
It raises the standard of living of a country's
residents, since they now have access to a wider variety of goods and services
for a more competitive price.
2. It can reduce the threat
of inflation, since the products are priced lower due to competition
from foreign goods.
3.
It indicates that the country's residents are feeling
confident, and wealthy, enough to buy more than the country produces. (So to
feel good u can go against her: A nation’s strength ultimately
consists in what it can do on its own, and not in what it can borrow from others. -Indira
Gandhi).
Negatives:-
A trade deficit can cause jobs
outsourcing. That's because,
as a country imports certain goods rather than buying domestically, the local
companies start to go out of business. The domestic business itself will lose
the expertise needed to produce that good competitively. As a result, fewer
jobs in that industry are created in the home country. Instead, the foreign
companies hire new workers to keep up with the demand for their exports.
* Hard currency (also known as a safe-haven currency or strong currency), in economics, refers to a globally traded currency that
is expected to serve as a reliable and stable store of value. Factors
contributing to a currency's hard status might include the long-term
stability of its purchasing power, the associated country's political and fiscal condition and outlook, and
the policy posture of the issuing central bank.
Current
Account: - Account of a country which
records export and import of goods & services including factor service
during one year period is called current account .It shows Performance of
domestic production sector in comparison to rest of the world.
Current Account is the sum of the
1.
Balance
of trade (exports minus imports of goods and services)
2.
Net
factor income (such as interest and dividends)
3.
Net
transfer payments (such as foreign aid).
The largest
component of the current account calculation is generally the balance of
trade.
A CAD
then means that the country is importing more goods and services than it is
exporting—although the current account also includes net income (such as
interest and dividends) and transfers from abroad (such as foreign aid), which
are usually a small fraction of the total. Expressed this way, a current
account deficit often raises the hackles of protectionists, who—apparently
forgetting that a main reason to export is to be able to import—think that
exports are “good” and imports are “bad.” If the deficit reflects
an excess of imports over exports, it may be indicative of competitiveness
problems, but because the current account deficit also implies an excess of
investment over savings, it could equally be pointing to a highly productive, growing
economy.
India’s Condition: The period between 2002 and 2008 can be considered India's golden age
of global trade when the current account deficit declined to 1.2 per cent of
GDP on the back of a surge of exports and capital flows. Needless to say,
services exports in particular ITES exports led the way with the latter
increasing its share from around four per cent in 1998 to 25 per cent a decade
later.
More than domestic policies it was the
international environment that favored India's export surge. Till the crash of
2008 world demand was buoyant and sustained the export drive of most emerging
economies including India. Four years after September 2008 the world has
changed – for the worse. India's exports have been slipping ever since as
demand dries up in the West what with the US still weak in its recovery and
Europe tackling rather ineffectively its slide into recession in many parts of
the Euro Zone. For the entire financial year 2011-12, CAD, which represents the
difference between exports and imports after considering cash remittances and
payments, stood at 4.2 per cent of GDP
at USD 78.2 billion-- again the all-time high level from $ 46 billion (2.7
per cent of GDP) in 2010-11?
So you have seen the India’s current account condition
(esp. of CAD) then definitely you have some suggestion to lessen the deficit (which
our leader, or say, our FM doesn’t have -just kidding . Let’s see
1. A devaluation of the exchange rate to help in boosting exports but it can cause currency war(as happened in Chinese context recently –what you thinks you are the only smart country then Mr. cool every country will go for the same practice and what will be started is called currency war)
2. Services exports should neutralize this higher trade deficit(particularly Indian context which is services sector supported economy think over it why we are transitioning from agricultural economy to services sector led economy directly skipping or leaving behind the manufacturing sector which may provide a lot of employment and growth required)
3. Any government’s expenditure reducing policy designed to reduce demand in the economy and so reduce consumer spending in the economy (and on imports in particular) falls into this category. On the fiscal policy side the government could increase taxes or reduce public spending. On the monetary policy side, interest rates could be raised If consumer spending falls in an economy, then spending on all goods and services, including imports, will fall. This will reduce a current account deficit. The big problem with this policy is that the deflation in the economy is likely to cause, at the very least, a slowdown and possibly a recession.
4. We should not think about ways to curb imports or subsidize exports. Rather we should focus on reforms to improve productivity.
Capital Account:
- Account of a country which records inflows and outflows of capital during the
year is called capital account.It includes capacity creation in domestic sector
due to foreign saving or domestic saving respectively.
The capital account records the net change
in ownership of foreign assets. It includes the reserve account (the foreign exchange
market operations of a nation's central bank),
along with loans and investments between the country and the rest of world.
BOP:-Ø The
sum of current account and capital account is called Balance of payments.
Ø
India’s interaction of
the world economy itself is called as analysis of balance of
payment account (BOP).
Deficits: What we most likely to depend upon
(also we like the most)
Fiscal
deficit
2. Revenue expenditure of which:(a)
Interest payments (b) Major subsidies (c) Defence expenditure
(a) Recovery of loans (b) Other receipt
(mainly PSU disinvestment) (c) Borrowings and other liabilities $
5. Total expenditure of which: {(a) Plan
expenditure (b) Non-plan expenditure} = Revenue expenditure + capital expenditure
7.
Primary deficit [6-2(a)]=fiscal
deficit –Interest payments
A TRADE DEFICIT occurs when the value
of a country's imports is greater than the
value of its exports. This means that the country's balance of trade is negative. But the
question arises, in case of trade deficit, if we are exporting less means earning
less and importing more means paying more (In hard currency* i.e. Dollar here)
then where we bring the deficit money.
Trade deficit:
Positives:-
1.
It raises the standard of living of a country's
residents, since they now have access to a wider variety of goods and services
for a more competitive price.
2. It can reduce the threat
of inflation, since the products are priced lower due to competition
from foreign goods.
3.
It indicates that the country's residents are feeling
confident, and wealthy, enough to buy more than the country produces. (So to
feel good u can go against her: A nation’s strength ultimately
consists in what it can do on its own, and not in what it can borrow from others. -Indira
Gandhi).
A trade deficit can cause jobs
outsourcing. That's because,
as a country imports certain goods rather than buying domestically, the local
companies start to go out of business. The domestic business itself will lose
the expertise needed to produce that good competitively. As a result, fewer
jobs in that industry are created in the home country. Instead, the foreign
companies hire new workers to keep up with the demand for their exports.
* Hard currency (also known as a safe-haven currency or strong currency), in economics, refers to a globally traded currency that
is expected to serve as a reliable and stable store of value. Factors
contributing to a currency's hard status might include the long-term
stability of its purchasing power, the associated country's political and fiscal condition and outlook, and
the policy posture of the issuing central bank.
Current
Account: - Account of a country which
records export and import of goods & services including factor service
during one year period is called current account .It shows Performance of
domestic production sector in comparison to rest of the world.
1. Balance of trade (exports minus imports of goods and services)
2.
Net
factor income (such as interest and dividends)
India’s Condition: The period between 2002 and 2008 can be considered India's golden age of global trade when the current account deficit declined to 1.2 per cent of GDP on the back of a surge of exports and capital flows. Needless to say, services exports in particular ITES exports led the way with the latter increasing its share from around four per cent in 1998 to 25 per cent a decade later.
1. A devaluation of the exchange rate to help in boosting exports but it can cause currency war(as happened in Chinese context recently –what you thinks you are the only smart country then Mr. cool every country will go for the same practice and what will be started is called currency war)
2. Services exports should neutralize this higher trade deficit(particularly Indian context which is services sector supported economy think over it why we are transitioning from agricultural economy to services sector led economy directly skipping or leaving behind the manufacturing sector which may provide a lot of employment and growth required)
