Consistent High Budget Deficit Unhealthy
for Economic Growth

Author : CA A. K. Jain

Fiscal deficit as a percentage of GDP .
The chart visually represents the fluctuations in the fiscal deficit over the years.

-Chapter Headings-

A. Preamble

B. Historical Back Ground

C. Deficit Financing In Developed & Developing Countries

1. Source of Borrowing :
2. Interest Rates :
3. Debt Sustainability :

D. Economic Impact :

*Adverse Impact of Large Budget Deficit
1. Increased Borrowing Costs :
2. Inflationary Pressure :
3. Crowding Out Private Investment :
4. External Vulnerabilities :
5. Constraints on Social Spending :

*Positive Aspects of Deficit Financing
1. Infrastructure Development :
2. Social Welfare Programs :
3.Counter-Cyclical Measures :

E. Government Action Plan
1. Fiscal Consolidation Measures :
2. GST Implementation :
3. Disinvestment :
4. Subsidy Rationalization :
5. Public Expenditure Management :
6. Monetization of Assets :
7. Reforms in Direct Taxation :
8. Austerity Measures :

F. Potential Strategies
1.Fiscal Consolidation :
2. Structural Reforms :
3. Targeted Subsidy Rationalization :
4. Boosting Revenue Mobilization :
5. Disinvestment and Privatization :
6. Control Administrative Expenditure :
7. Enhance Public Sector Efficiency :
8. Strengthen Public-Private Partnerships :
9. Implement GST Reforms :
10. Debt Management Strategies :
11. Enhance Export Competitiveness :

G. Conclusion


India, with its vibrant culture, diverse population, and burgeoning economy, stands at the cusp of becoming a global economic powerhouse. However, one key obstacle hindering its progress is the persistent issue of a large budget deficit. A budget deficit occurs when a government's expenditures exceed its revenues, leading to borrowing to cover the shortfall. In the Indian context, this deficit poses significant challenges to sustainable economic development. This article delves into the repercussions of India's large budget deficit and explores potential solutions to address this pressing concern.

Historical Back Ground
Deficit financing in India has been a significant aspect of its economic policy since independence in 1947. Here's a brief history along with some key figures:

Initial Year 1947-1960 : After independence, India faced significant challenges in building infrastructure and industrialization. To finance these development projects, the government resorted to deficit financing. During this period, the fiscal deficit was relatively moderate, hovering around 2-3% of GDP.

Years 1960-1970 : The fiscal deficit started to increase due to the implementation of various social welfare programs, Five-Year Plans, and nationalization of industries. In the 1960s, the fiscal deficit was around 3-4% of GDP, and by the 1970, it rose to around 5-6% of GDP.

Years 1980-2000 : Deficit financing in India from 1980 to 2000 had a mixed impact on the economy. While it facilitated essential public investments and supported economic activities, it also led to inflationary pressures and fiscal instability. The economic reforms of the early 1990s marked a turning point, emphasizing the need for fiscal discipline and sustainable economic policies. By the end of the 20-year period, India had made significant strides towards economic stabilization and growth, aided by a more prudent approach to deficit financing.

Years 2000-2010 : During this decade, deficit financing in India played a crucial role in fostering economic growth, especially during challenging times like the global financial crisis. While it supported public investment and development, it also posed challenges such as inflationary pressures and rising public debt. The period underscored the importance of balanced fiscal policies, strategic borrowing, and effective monetary management to ensure sustainable economic growth and stability. Fiscal Responsibility and Budget Management Act, 2003 aimed to institutionalize fiscal discipline, reduce the fiscal deficit, and ensure long-term macroeconomic stability. The sustainability of high public debt became a concern, emphasizing the need for fiscal consolidation and prudent financial management in subsequent years. The FRBM Act and subsequent amendments aimed to strengthen fiscal discipline. Though targets were missed during the crisis, the framework provided a foundation for fiscal prudence.

Years 2010-2015 : The period from FY 2010 to FY 2015 saw a gradual shift towards fiscal consolidation, setting the stage for sustainable economic growth and stability in the subsequent years. The long-term impact of these policies reflects in India's evolving economic landscape, characterized by improved fiscal discipline and continued efforts towards inclusive growth. India experienced significant changes in its economic landscape, with deficit financing playing a crucial role in shaping the economic policies and outcomes. Global Financial Crisis Impact (2008-2009) crisis necessitated increased government spending to stimulate economic recovery. This led to higher fiscal deficits as the government increased expenditure on infrastructure, social schemes, and subsidies. Higher fiscal deficits led to inflationary pressures, particularly in the earlier part of the period (2010-2012). High levels of borrowing and money supply growth contributed to persistent inflation, especially in food and fuel prices. Persistent high deficits exerted upward pressure on interest rates as the government competed for borrowing with the private sector. This crowding-out effect led to higher borrowing costs for businesses and consumers. Increased borrowing to finance the deficits led to a rise in the public debt-to-GDP ratio.

Years 2015 -2024 : Fiscal deficit remained a challenge due to factors like increasing government expenditure, subsidies, and slowing economic growth. Reforms continued to focus on fiscal consolidation and reducing the fiscal deficit as per the targets set by the FRBM Act.

High fiscal deficits led to increased public investment to boost economic growth. However, excessive deficits also resulted in inflationary pressures and higher interest rates, potentially crowding out private investment. Persistent fiscal deficits have contributed to an increase in public debt. While this can be manageable in the short term, long-term sustainability becomes a concern if the debt grows faster than the economy.

Large deficits, especially during the pandemic, were financed through borrowing, which can lead to higher inflation if not managed properly. Deficits have enabled the government to increase spending on welfare schemes, which is crucial for poverty alleviation and improving social indicators. Programs in healthcare, education, and rural development have been particularly significant.

Fiscal deficits also affected the current account deficit and exchange rates. A higher fiscal deficit results in weaker currency, affecting trade balance and foreign reserves.

The fiscal deficit has played a dual role in India's economic development over the past decade. While it has facilitated critical investments and welfare expenditures, ensuring fiscal discipline remains crucial to maintaining economic stability. Sustainable management of deficits, alongside structural reforms and efficient public spending, is essential for India's long-term economic health and development.


 Deficit Financing in Recent Years :


Fiscal Deficit % of GDP

Year % of GDP
2009-10 6.50%
2010-11 4.80%
2011-12 5.70%
2012-13 4.80%
2013-14 4.50%
2014-15 4.10%
2015-16 3.90%
2016-17 3.50%
2017-18 3.50%
2018-19 3.40%
2019-20 4.60%
2020-21 9.50%
2021-22 6.90%
2022-23 6.40%
2023-24 5.90%



India Exchange Rate

Year Exchange Rate (INR per USD)
2013 58.63
2014 61.03
2015 64.15
2016 67.21
2017 65.12
2018 68.4
2019 70.39
2020 74.1
2021 73.93
2022 77.74
2023 82.00

Deficit Financing In Developed & Developing Countries.

A Comparison
Deficit financing, which involves a government spending more money than it receives in revenue and covering the gap by borrowing, is a common practice in both developed and developing countries. However, there are significant differences in how it is implemented, its impact, and the challenges faced by developed countries like the United States and Japan compared to developing countries like India.

Key Differences
1. Source of Borrowing :
Developed Countries : They often borrow from domestic markets or issue bonds that are purchased by both domestic and international investors. For example, the U.S. issues Treasury securities.
Developing Countries : They may rely more on foreign aid and loans from international organizations such as the IMF or World Bank. India, for instance, has a mix of domestic and foreign borrowing.

2. Interest Rates :
Developed Countries : Typically face lower interest rates on their debt due to higher credit ratings and perceived lower risk. For example, U.S. Treasury bonds have very low yields.

Developing Countries : Often face higher interest rates due to higher perceived risk. India’s government bonds typically have higher yields compared to those of developed countries.

3.Debt Sustainability :
Developed Countries : Have more established and stable financial systems, which make it easier to manage and sustain higher levels of debt. For instance, Japan has a high debt-to-GDP ratio but manages it due to strong domestic savings and a stable economy.

Developing Countries : May struggle with debt sustainability due to less stable economic conditions and lower credit ratings. India has a moderate debt-to-GDP ratio but faces challenges in maintaining sustainable debt levels.

4. Economic Impact :
Developed Countries : Deficit financing can be used effectively to stimulate economic growth during downturns without causing significant inflation. For example, the U.S. used deficit financing extensively during the 2008 financial crisis.

Developing Countries : May face higher inflation and interest rates with deficit financing, which can hinder economic growth. India, for example, must carefully balance deficit financing to avoid inflationary pressures.

** United States Japan India
Debt-to-GDP Ratio 130% ( 2023) 250% (2023) 90% in 2023
Fiscal Deficit 14.9% of GDP 7.5% of GDP in 2020 6.9% of GDP in 2021-22
Interest Rates
10-year Treasury bond yield around
1.5% in 2021 Near 0% due to low-interest-rate 6-7% in 2021

In summary, while both developed and developing countries engage in deficit financing, the sources, costs, sustainability, and economic impacts of such financing vary significantly. Developed countries like the U.S. and Japan benefit from more stable economies and lower borrowing costs, allowing them to manage higher debt levels more sustainably. In contrast, developing countries like India face higher borrowing costs and greater risks related to inflation and debt sustainability, requiring more cautious and balanced approaches to deficit financing.

Adverse Impact of Large Budget Deficit

1. Increased Borrowing Costs : A substantial budget deficit necessitates borrowing from domestic and international sources to finance government spending. This results in higher interest payments, diverting funds away from productive investments and essential public services. A sustained high debt-to-GDP ratio may lead to concerns about fiscal sustainability. As per the IMF, a ratio above 60% is considered a threshold for emerging economies.

2. Inflationary Pressure : Excessive government borrowing can fuel inflationary pressures by increasing the money supply in the economy. This erodes purchasing power, particularly affecting low and middle-income households, and creates uncertainty for businesses. For example, during the 1980s and early 1990s, high deficit financing in India contributed to double-digit inflation rates. There is a positive correlation between high fiscal deficits and inflation rates in India, particularly noticeable in the pre-liberalization period (before 1991).

3. Crowding Out Private Investment : High government borrowing tends to crowd out private investment by absorbing available funds in the financial market. This diminishes the pool of capital accessible to businesses, hindering their expansion plans and innovation efforts. This can be seen during periods of high fiscal deficits in the early 2010s when private sector investment growth was sluggish.

4. External Vulnerabilities : Reliance on foreign borrowing to finance deficits exposes the economy to external vulnerabilities, such as fluctuations in exchange rates and global interest rates. Sudden shifts in investor sentiment or economic conditions abroad can exacerbate India's fiscal challenges.

5. Constraints on Social Spending : A large portion of the budget may be allocated to servicing debt, leaving limited resources for critical social sectors like education, healthcare, and infrastructure. This impedes human capital development and long-term economic growth prospects.

Positive Aspects of Deficit Financing

Infrastructure Development : Government borrowing can finance large infrastructure projects, leading to job creation and increased economic activity. For example, the Pradhan Mantri Gram Sadak Yojana (PMGSY), aimed at improving rural road connectivity, saw significant investment, leading to improved market access for rural producers.

Social Welfare Programs : Increased government spending on social sectors such as education, healthcare, and social security can enhance human capital. For instance, the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) has provided employment to millions, boosting rural consumption.

Counter-Cyclical Measures : During economic downturns, deficit financing can act as a counter-cyclical measure to boost demand. For example, post-2008 financial crisis, India increased public spending to stimulate the economy, which helped in maintaining a relatively high growth rate compared to other major economies.

Government Action Plan

India has indeed faced challenges related to its large budget deficit, which can act as a barrier to economic development if not managed effectively. To address this issue, the Indian government has implemented various measures aimed at reducing the deficit and improving fiscal discipline. Here are some of the key efforts and initiatives:

1. Fiscal Consolidation Measures : The government has focused on fiscal consolidation by aiming to reduce the fiscal deficit as a percentage of GDP. This involves controlling government spending and increasing revenue generation.

2. GST Implementation : The Goods and Services Tax was introduced in India in 2017 to simplify the tax structure and broaden the tax base. This indirect tax reform aims to enhance tax compliance and boost revenue collection, thereby contributing to deficit reduction.

3. Disinvestment : The government has been actively pursuing disinvestment of its stake in public sector enterprises . This involves selling government-owned assets to private investors, which not only raises revenue but also improves the efficiency of these enterprises.

4. Subsidy Rationalization :
The government has taken steps to rationalize subsidies, particularly those on fuel, food, and fertilizer. By targeting subsidies to the intended beneficiaries and reducing wasteful expenditure, the government aims to contain the fiscal deficit.

5. Public Expenditure Management : Efforts have been made to enhance the efficiency and effectiveness of public expenditure. This includes better targeting of welfare schemes, improving infrastructure spending, and reducing non-productive expenditure.

6. Monetization of Assets : The government has initiated plans to monetize public sector assets such as roads, railways, and airports. This involves leasing out or selling these assets to private players, thereby unlocking their value and generating revenue for the government.

7. Reforms in Direct Taxation : Reforms in direct taxation, such as lowering corporate tax rates and simplifying the tax structure, have been implemented to stimulate economic growth and enhance tax compliance.

8. Austerity Measures : The government has also implemented austerity measures to control unnecessary expenditures, such as reducing non-essential government expenses and avoiding wasteful spending.

While these efforts have been undertaken to address India's budget deficit, the effectiveness of these measures depends on various factors such as economic growth, global economic conditions, and policy implementation. Continuous monitoring and evaluation are essential to ensure progress towards fiscal sustainability and economic development.

Due to the COVID-19 pandemic, India's fiscal deficit widened significantly as the government had to increase spending to support the economy. The fiscal deficit for the fiscal year 2020-21 was around 9.3% of GDP, the highest in decades. Fiscal consolidation efforts were hampered by the need for stimulus measures to revive the economy post-pandemic.

According to Finance Minister , Smt. Sitharaman ,the fiscal deficit in 2024-25 is estimated to be 5.1 per cent of GDP. Adhering to the path of fiscal consolidation as mentioned in her Union Budget speech for 2021-22, she mentioned to reduce it below 4.5 per cent by 2025-26.

Potential Strategies

Here are several strategies the Indian government can consider.

1. Fiscal Consolidation : Implementing measures to reduce government spending and enhance revenue generation is essential for fiscal consolidation. This may involve rationalizing subsidies, improving tax compliance, and enhancing efficiency in public expenditure management.

2. Structural Reforms : Structural reforms aimed at enhancing the business environment, promoting investment, and fostering inclusive growth can bolster revenue streams and reduce the need for deficit financing. Streamlining regulations, facilitating ease of doing business, and investing in infrastructure can stimulate economic activity and revenue generation.

3. Targeted Subsidy Rationalization : Reorienting subsidy programs to target beneficiaries more effectively and reduce leakages can help curb expenditure without compromising social welfare objectives. Direct benefit transfer schemes leveraging technology can enhance transparency and efficiency in subsidy delivery. In FY 2020-21, the Indian government allocated around INR 2.67 lakh crore on subsidies. By better targeting these subsidies, especially in sectors like fuel, food, and fertilizers, significant savings can be achieved.

4. Boosting Revenue Mobilization : Broadening the tax base, improving tax administration, and introducing tax reforms to simplify the tax system can augment revenue mobilization efforts. This includes phasing out exemptions, rationalizing tax rates, and combating tax evasion to ensure a more equitable distribution of the tax burden. India's tax-to-GDP ratio is around 11-12%. In comparison, developed countries have a tax-to-GDP ratio of 25-30%. Aiming to increase India's tax-to-GDP ratio to 15% could significantly boost revenue.

5. Disinvestment and Privatization : Selling stakes in unprofitable public sector enterprises can generate substantial revenue.Some companies are in the pipeline for strategic sale . This includes Shipping Corporation of India , NMDC Steel Ltd, BEML, HLL Lifecare, and IDBI Bank . A few more have in-principle approval for disinvestment: Rashtriya Ispat Nigam Limited, Container Corporation of India , and some subsidiaries of Air India Asset Holding Ltd fall under this category

6. Control Administrative Expenditure : Through streamlining government operations and few austerity measures government can substantially reduce administrative costs. A 10% reduction through efficiency measures could save few thousand crores.

7. Enhance Public Sector Efficiency :
Improving the efficiency of public sector units (PSUs) can reduce losses and increase profitability. Some well-known examples of loss-making PSEs include: Bharat Sanchar Nigam Ltd , Mahanagar Telephone Nigam Ltd (MTNL)Air India Assets Holding Ltd, Eastern Coalfields Ltd, Alliance Air Aviation Ltd ,HMT Machine Tools, Rajasthan Electronics and Instruments, Bharat Heavy Electricals Ltd (BHEL),NEPA, Hindustan Salts, Sambhar Salts, Andrew Yule and Co. Ltd, Heavy Engineering Corp. Ltd, Cement Corp. of India and Hindustan Photo Films Manufacturing Company.

8. Strengthen Public-Private Partnerships : Encouraging PPPs in infrastructure projects to leverage private investment can help in raising supplementary resources. The National Infrastructure Pipeline (NIP) envisions an investment of INR 111 lakh crore (USD 1.5 trillion) by 2025, with a significant portion expected from the private sector.

9. Implement GST Reforms :
Simplifying the GST structure and reducing rates to increase compliance and collection. GST collections have seen fluctuations. Consistent monthly collections above INR 1 lakh crore (USD 14 billion) can stabilize revenue flows.

10. Debt Management Strategies : The long-term trend highlights the growing reliance on borrowing to funds. Adopting prudent debt management strategies, including lengthening debt maturity profiles, diversifying funding sources, and refinancing high-cost debt, can mitigate the adverse effects of debt accumulation and reduce borrowing costs over the long term.

India Debt-to-GDP Ratio

2023-24 84%
2020-21 90%
2018-19 74%
2013-14 70%
2008-09 67%

Traditional Sources of borrowing for the Indian Government include issuance of government securities (G-Secs) and treasury bills (T-bills) to institutional and individual investors, small savings schemes, provident funds,: Loans and advances from the Reserve Bank of India and other commercial banks.

External Borrowing sources are bilateral loans ,loans from foreign governments, World Bank, International Monetary Fund, Asian Development Bank ,Sovereign Bonds etc. Churning of national loan portfolio can result in substantial savings in interest payments. Bonds targeted at the Indian Diaspora, which can often be raised at lower costs due to the emotional and patriotic attachment of the Diaspora.

With suitable and attractive scheme, Bond Issues can also be targeted at persons and institutions unable to show source of funds both in and outside India .Bonds issued for environmental projects, which can sometimes attract lower interest rates due to the specific interest of environmentally conscious investors. In recent years, India's international Sovereign Bonds have typically seen yields ranging between 3% to 6%, depending on maturity, market conditions, and investor demand.

11. Enhance Export Competitiveness : Boosting exports to improve the trade balance and reduce the need for deficit financing. India's export growth has been moderate. Targeting sectors like pharmaceuticals, IT, and textiles can improve the trade surplus.


India's large budget deficit poses formidable challenges to its economic development agenda, necessitating concerted efforts to address fiscal imbalances and promote sustainable growth. By pursuing arduously fiscal consolidation measures, implementing structural reforms, enhancing revenue mobilization efforts and sourcing alternative revenue sources, India can i navigate the path towards fiscal sustainability and unleash its full economic potential. However, achieving these objectives will require strong political will, policy coherence, and stakeholder collaboration to surmount the hurdles posed by the budget deficit and paves the way for a prosperous future.

Industrial And agricultural loan write off , unplanned politically influenced expenditure announcement , interest expenditure on increasing government borrowings , subsidies compel the government to resort to deficit financing . Judicious application of revenue can bring deficit financing to acceptable levels.



**********Disclaimer: The information and statistics presented in this article have been compiled from various sources deemed reliable. However, readers are advised to independently verify the accuracy and relevance of the data before making any decisions or taking action based on the information provided herein. The author and publisher do not assume any responsibility or liability or any consequences resulting from reliance on the information presented in this article.


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