Macroeconomic Management of the Indian Budget Deficit

Abstract
A substantial and stable budget deficit has been one of India's major
macroeconomic issues since the mid-1980s. The aim of this study is to examine
the trends in Indian government revenue and spending as well as the influence
of India's fiscal deficit on GDP growth. Effective macroeconomic management
is essential for creating jobs and reducing poverty as a result of development.
According to this viewpoint, private investment is critical to reviving the
economy. However, the persistence of macroeconomic imbalances, which is
sadly a feature of the Indian economy, has presented a significant danger to
economic growth and development. As a result, there is some confusion over
how India's fiscal deficit affects GDP. The analysis is done by time series
analysis based on secondary data obtained from the IMF (International
Monetary Fund) and the World Bank from 1995 to 2016. In this study, the
linear regression model was used to examine the influence of fiscal deficit on
GDP growth in India. The primary goal of this study is to investigate the
variables that are responsible for the rising fiscal deficit in India, taking into
consideration all aspects that might impact fiscal deficit status. According to the
analysis, GDP is not the root cause of the fiscal imbalance.
Introduction
Fiscal imbalance is a hot issue among the economists because of its
causes and repercussions on a country's economy. The fiscal imbalance is the
gap between the government's revenues and expenditures. A country's
government typically has two forms of income in its financial plan: tax revenue
and non-tax revenue (like duties, fees, and other duties). Government
expenditures of a country, on the other hand, may include material consumption
of the public sector, wages of government workers, depreciation of fixed
national capital, and different forms of transfers to the people. The difference
between the two is either negative or positive fiscal imbalance, referred to as the
budget deficit or surplus, respectively. When the fiscal imbalance is positive,
government revenue surpasses the expenses that appear to help the economy.
Severe negative financial imbalances, on the other hand, can be a significant
concern for the economy. It is because the government's expenditures
outnumber its revenues. Increased spending indicates that the government has
borrowed money, either domestically or internationally. In this case, a fiscal
deficit suggests that the government does not have enough money to cover its
commitments. According to (Rakesh, 2000), if the government continues to

spend more than it earns over time, the country's macroeconomic stability
would be jeopardised.
A large negative financial imbalance creates an unfavourable
circumstance in which the government provides additional costs greater than
revenue through loans. In recent years, the budget deficit in India has been a
source of worry since the Indian economy has been in chronic deficit. India's
high fiscal deficit is a serious macroeconomic issue. Fiscal consolidation has
been at the centre of policy debate in India since the early 1990s. However, the
real administrative mechanism to regulate it constitutionally was enacted in
2003, and the Fiscal Responsibility & Budget Management (FRBM) Act went
into effect in April 2004. Higher deficits, it has always been argued, would
have a negative impact on the macroeconomy and thus should be kept under
control. However, the literature on the relationship of the fiscal deficit to
macroeconomic variables such as inflation, interest rate, economic growth rate,
and current account deficit provides mixed evidence. This study attempts to
evaluate the influence of India's budget deficit on GDP growth in order to
determine whether or not there is an impact. What is the magnitude of the
impact, if any? Also, to determine if or not there is a link between these two
variables.
LITERATURE REVIEW
The fiscal deficit is a notion connected to government revenue and spending,
with the gap between the two determining the budgetary deficit. There are
several perspectives on the influence of a country's fiscal imbalance on its GDP.
Ali (2019) studied the influence of India's fiscal deficit on GDP growth from
1999 to 2013. The article employed two distinct models to examine the
influence and connection between the variables, namely linear regression and
Pearson's correlation models. The research discovered that the budget deficit
has a 5% meaningful negative connection with GDP growth. Furthermore, the
linear regression model revealed that changes in the budget deficit will affect
the country's GDP.
Sharma & Mittal (2019) tried to analyze the impact of India's fiscal deficit on
GDP growth from 1985 to 2015. Different macroeconomic factors were also
utilized in that research. Furthermore, the ARDL model was used to examine
the link between the two variables, and it was discovered that fiscal deficit had a
negative correlation with the economy in both the short and long term. In that

paper, the Granger Causality test was applied, and it was discovered that the
budget deficit affected GDP growth, although the negative effect was not
significant. The findings of this study support the Neo-classical position on the
influence of the budget deficit on the Indian economy.
According to them, the Indian government should focus more on resource
utilization in order to minimize difficulties that would result in a budget
imbalance.
Amrutha, Gowda, Zainab, & Rahmi (2017) examined the short-term and long-
term connection between India's budget deficit and GDP growth. The data from
1980 to 2013 and the Johansen approach were utilized in the study to examine
the connection between variables. The article discovered that the fiscal deficit
has a negative connection with GDP growth, with a 1% rise in the fiscal deficit
causing GDP to fall by 0.61 percent. And they believed that the government
should focus on closing the revenue-to-expenditure imbalance.
Anantha and Gayithri (2017) attempted to solve the puzzle using long-term
serial analysis from 1980-81 to 2012-13. It featured a detailed examination of
the composition of the budget deficit and its influence on GDP using a vector
error correcting method. The article established that the fiscal deficit hurt
growth and suggested that when money is spent on capital development, the
overall "golden rule" of public finance benefits growth.
Iqbal, Din, and Ghani (2017) studied the link between the budget deficit and
GDP growth in Pakistan. In that study, which examined data from 1972 to 2014,
the smooth transition autoregressive model was also used. The study discovered
that fiscal deficit had a negative link with GDP growth, with a 5.57 percent
impact on the country's GDP. And they believed that by encouraging the
government to invest in productive projects through fiscal policy, the
government might boost long-term growth potential.
Hussain and Haque (2017) investigated the link between fiscal deficit and
economic growth in Bangladesh, as well as the influence of fiscal deficit on
economic growth, using two separate datasets. According to VECM for BBS,
they discovered a favourable association between the variables to validate the
Keynesian theory. However, according to VECM for World Bank data, there
was a negative association between the variables at a 5% significant level.

Gupta and Singh (2016) concentrated on identifying important changes in
India's fiscal policy after 1980-81, following post-liberalization and during
times of crisis.
The report discovered that the budget deficit was unsustainable from 1980 to
2002. The government's initiatives reduced unsustainability beginning in 2003,
when the Indian government implemented new rules.
Rahman (2012) examined the link between budget deficits and economic
development in Malaysia using quarterly data from 2000 to 2011. According to
Ricaria's equivalence hypothesis, there is no long-term link between Malaysian
economic development and the budget deficit.
Taylor et al. (2012) examined the relationship between fiscal deficit, debt, and
growth in a time-series analysis of the US economy. The authors suggested that
the primary budget deficit has a considerable beneficial influence on growth
using the VEC framework and quarterly data from 1961 to 2011. They
discovered that more debt has a negative impact on growth, but the causation
conclusion demonstrated that a larger debt-to-GDP ratio is a result, not the
cause, of low growth. Total expenditure had a positive relationship with GDP,
whereas tax revenue moved in the other way. The authors make a solid case that
a larger budget deficit stimulates the economy during a recession.
In this paper, Vincent and Ioraver (2012) evaluated the impact of budget deficits
on economic growth. According to their data, they discovered a negative
association between the factors (fiscal deficit and GDP growth). They estimate
that a 1% increase in the budget deficit will reduce GDP growth by 0.023
percent.
Tiwari (2011) investigated the relationship between India's fiscal deficit and
inflation. The goal of this research was to look at the most effective ways to
increase India's budget deficit. Furthermore, the report discovered that inflation
is not a factor that can alter the budget deficit. However, the study
acknowledged that the money supply and government spending are the two
most important factors influencing the fiscal deficit.
Sheikh. R. et al. (2010) investigated the relationship between Pakistan's state
debt and economic development. The article discovered that the variables have
an inverse connection.