While the Fiscal deficit ratio is hopefully slated to come down in the years to come, what is worrisome is that the Revenue Deficit is on the rise. As per the reports appearing in the newspapers, this ratio has gone up from about 42% in 2007-08 to 73 % now. For starters, the ratio signifies the amount of money that is used for consumption out of the total govt borrowing.
Borrowing for investing is a good thing, but when you start borrowing to consume, it really is a cause for worry. What is true at a personal level is also correct at the national level. With this ratio at 73%, it means that only Rs 27 is invested out of 100 that the govt borrows. Considering the cost of capital to be 8%, the govt would need a return of at least 30 % on the Rs 27 invested to just meet the interest liability. That kind of a return is even beyond the private sector, and is just not within the reach of the Govt. So the short point is that, it is the revenue deficit that is a better indicator of a nation’s finance than the fiscal deficit. Do not cheer too much at the proposed finance bill. It is always a good habit to go in depth and read the fine print.
Borrowing for investing is a good thing, but when you start borrowing to consume, it really is a cause for worry. What is true at a personal level is also correct at the national level. With this ratio at 73%, it means that only Rs 27 is invested out of 100 that the govt borrows. Considering the cost of capital to be 8%, the govt would need a return of at least 30 % on the Rs 27 invested to just meet the interest liability. That kind of a return is even beyond the private sector, and is just not within the reach of the Govt. So the short point is that, it is the revenue deficit that is a better indicator of a nation’s finance than the fiscal deficit. Do not cheer too much at the proposed finance bill. It is always a good habit to go in depth and read the fine print.
it might not be a bad idea to break the whole thing up into paragraphs
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