Podcast 11th July 2014
Transcript of Podcast
Consider this. India’s fiscal deficit has gone up from levels of Rs 3370 billion in fiscal 2008-09 to levels of Rs 5081 billion in fiscal 2013-14, a jump of 51%. However as a percentage of GDP, fiscal deficit has come off from 6% of GDP to 4.5% of GDP. India has shown improved fiscal position despite a jump in absolute levels of deficit.
The reason for fiscal deficit as percentage of GDP coming off since 2008-09 is inflation. GDP at current market prices is known as the Nominal GDP that is not adjusted for inflation. Real GDP, which is seen as the growth indicator of the economy is nominal GDP adjusted for inflation by the GDP deflator.
India has seen high Nominal GDP growth that has doubled in the 2008-09 to 2013-14 period. However, Real GDP has gone up by just 38% in the same period. Chart 1 gives you the growth rates of Nominal and Real GDP over the 2008-09 to 2013-14 period.
Chart 1. Nominal and Real GDP growth rates
Source: Government of India
High Nominal GDP growth hides Fiscal Deficit
Fiscal Deficit is going up in absolute values but is coming down, as a percentage of GDP and the reason is high Nominal GDP growth. Table 1 shows the growth in Nominal GDP and Fiscal Deficit and the fall in Fiscal Deficit to GDP ratio for the period 2008-09 to 2013-14.
How does inflating away the fiscal deficit help the government? The government is able to finance its fiscal deficit through market borrowings, as there is more liquidity in the system. Banks in India that fund over 50% of government borrowings have seen deposits double since 2008-09.
The fallout of inflating away the fiscal deficit is that value of fixed income investments such as Fixed Deposits, PPF or Mutual Fund Schemes comes down in absolute or relative terms as inflation eats away the fixed incomes. The domestic saver ends up suffering the consequences of the government inflating away the fiscal deficit.
The domestic saver is you and me!!
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