B.A. ECONOMICS (HONOURS)

GARGI COLLEGE,

UNIVERSITY OF DELHI

IInd year

SEMESTER IV

TERM PAPER:

RELATIONSHIP BETWEEN BUDGET

DEFICIT, INFLATION AND FISCAL

POLICY FOR INDIA

SUBMITTED TO-

GANESH MANJHI

SUBMITTED BY-

PANAV JAIN- 130527

SHUBHANGI AGARWAL-130728

SHWETA SHEKHAR 130936

TANYA JAIN 130704

AKNOWLEDGEMENT:

We would like to express gratitude towards our Macroeconomics teacher Mr Ganesh Manjhi.

Without his sincere guidance, this term paper would not have been possible.

OBJECTIVE This study analyses the relationship between Government policies, budget

deficit and inflation in India. The main objective of this study is to examine

the factors that are responsible for increasing fiscal deficit in India, by taking

into account all factors that can affect the status of fiscal deficit by running

regression models and hypotheses testing. The study finds that inflation is not

at all cause of fiscal deficit. However, government expenditure and money

supply are found to be important determinants of increasing fiscal deficit.

Introduction

Are deficits in the government‟s budget inflationary? In the monetarist

framework, deficits tend to be inflationary. This is because when

monetization takes place, it will lead to an increase in money supply and,

ceteris paribus, increase in the rate of inflation in the long run.

Instant cause of inflation is associated with money supply ,developments in

monetary stance are indicative of other sectors of the economy. In India, it is

generally argued that fiscal imbalances might have played an important role

in explaining price fluctuation. Hence, twin problems of fiscal deficit and

inflation have been given a lot of importance in budget of Central

government in India.

The relationship between fiscal policy and inflation is the fact that fiscal

policy is a macroeconomic tool that is utilized by the government to

influence the level of economic activity in a country. Such fiscal policies are

applied to achieve a desired effect in the economy after an analysis of the

economic trends in the economy under consideration. If the analysis reveals

undesirable economic trends like inflation, the government could use fiscal

policy as one of the methods for reversing the trend or bringing it under

control.

Fiscal policy and inflation connections can be seen in the manner in which

various adjustments to the taxation scheme influences the level of inflation in

the economy. Assuming the government decides to increase the level

of income tax, this type of policy will have a wider effect that will affect

inflation levels. Such an increase in the taxation of personal income will lead

to a corresponding decrease in the total disposable or spendable income of

consumers. The assumption is that when consumers do not have as much

money to spend after the calculation of their net pay, they will make a

downward reversal in their spending and consumption habits, reducing the

aggregate demand in the economy, and also bringing down the level of

inflation.

Another connection between fiscal policy and inflation can be seen in the

effect that a contractionary, fiscal policy has on the economy. When the

government observes unwanted inflationary trends, it can arrest or reduce

such a trend by reducing its expenditure in relation to its tax revenue for the

year. In such a situation, the government limits its rate of spending. Such a

practice will serve to reduce the level of economic activity, causing a

reduction in the amount of money in the economy and reducing the level of

inflation.

Pressure may be mounting on the Reserve Bank of India from within the

country to lower interest rates, but multilateral lender International Monetary

Fund has favoured a tighter monetary policy to bring down inflation, even as

it has described the country as a "bright spot" in the world economy.

Finance Minister Mr. Arun Jaitley has said to keep fiscal discipline in mind

despite need for higher investment.

LITERATURE REVIEW

In the analysis of literature, we focused firstly about fiscal deficit and

inflation relation in general. The basic concern was, to look at the founders of

approaches or models from where we could get the basic insights.

The fiscal deficit and inflationary situation have been reviewed by many

scholars, we study their term papers and the notable points are mentioned in

the literature. As the 2015 budget just announced this is one of the hot topics

in economics.

There are a number of empirical evidences available to analyze the

relationship between fiscal deficit, money supply and inflation. Most of the

studies have analyzed how fiscal deficit and money supply affect inflation.

Very few attempts have been made to analyze the causation running from

both ways i.e., how inflation affects fiscal deficit and fiscal deficits affects

inflation. The noteworthy are Miller (1983), Agheveli and Khan (1978), and

Ndebbio (1998).

In the theory of economics according to the classical view, which is related to

the quantity theory of money (QTM), fiscal deficits cause inflation because

governments that run persistent fiscal deficits tend, over time, to resort to

money creation to finance the deficit. On the other hand, according to more

recent studies leading to a fiscal theory of price level(FTPL), money creation

is not the only factor through which fiscal policy becomes the leading factor

and budget deficits cause inflation. In the other words, FTPL theory says that

a fiscal dominant(i.e., non-Ricardian situation) regime may arise when fiscal

policy is not sustainable and government bonds are considered net wealth

(Woodford, 1998). These wealth effects could endanger the objective of price

stability, irrespective of central bank commitment to down inflation. Thus

according to the FTPL theory it is fiscal, not monetary, policy that determines

the price level.

Hamburger and Zwick (1981) argued from the monetarist view that budget

deficits can lead to inflation, but only to the extent that they are monetarized.

Hence, according to the monetarist (and neo-classical) approach, changes in

the inflation rate is highly correlated to changes in the money supply.

Normally, the budget deficit on its own does not cause inflationary pressures,

but rather affects the price level through the impact on money aggregates and

public expectations, which in turn trigger movements in prices. Hence, the

monetarist view postulates that abiding and persistent growth of prices is

necessarily preceded or accompanied by a sustained increase in money

supply and therefore, in the present study we have focused on this aspect and

limited ourselves to the monetarist approach.

Dwyer (1982) explained that the most direct connection between government

deficits and inflation is that by increasing the real value of outstanding bonds

and perceived net wealth, a deficit can raise total spending and the price level

because the economy is operating at full employment.

Empirically, inflation results in widening fiscal deficit which are often

financed through the banking system leading to excessive liquidity in the

system and thus generating inflation. Hiller noted that inflation raises the cost

of government services and investments and increases budgetary demands for

distributional transfer while simultaneously increasing, the amount of

revenue collected. Furthermore, Blejar and Khan confirmed the two way

causation between fiscal deficit and inflation noted that “fiscal deficit

whether financed from borrowing from the public or the banking system are

necessarily inflationary.”

Tiwari and Tiwari (2011) examined the linkage between fiscal deficit and

inflation in India by taking into account all factors that can affect the status of

fiscal deficits. They found that inflation is not at all cause for the fiscal

deficit. However, government expenditure and money supply were found to

be important determinants of mounting fiscal deficit.

Pandey (2012) has made an attempt to test the direction of causality among

government expenditure, inflation, money supply and fiscal deficit. His

approach suggests that both government expenditure and money supply cause

fiscal deficit while standard causality test indicates that only government

expenditure cause fiscal deficit. And money supply cause government

expenditure and fiscal deficit cause money supply. Further, the most

interesting one, he found that inflation does not cause any of the test variable

included in the model and no variable included in the model cause fiscal

deficit.

IMF working paper by Luis Catao and Marco E. Terrones(April 2003) has

sought to address the issues of fiscal deficit. In their research fiscal deficits

have been shown to matter not only during high and hyperinflations but also

under moderate inflation ranges, even though the effects are substantially

weaker.

Deficit-inflation relationships are surprisingly found to be more stronger.

However, on the other hand they did not detect any positive and strong

connection between deficits and inflation in advanced economies and low-

inflation countries. They also describe the reason for the same. Regarding the

low-inflation group, since half of its constituents consist mostly of very

small, open economies with longstanding hard pegs or those that have given

up their national currencies altogether, the assumption of fiscal dominance

underlying the theory is either severely weakened or nonexistent. Last this

paper has also shown that the statistically significance of the fiscal deficit-

inflation relationship in most countries is relatively robust to alternative

specification.

THEORY

WHAT IS BUDGET DEFICIT? When the government expenditure exceeds revenues, the government is

having a budget deficit. Thus the budget deficit is the excess of government

expenditures over government receipts (income). When the government is

running a deficit, it is spending more than it's receipts.

The government finances its deficit mainly by borrowing from the public,

through selling bonds, it is also financed by borrowing from the Central

Bank.

Types of Budgetary Deficit ↓

The different types of budgetary deficit are explained in following points :-

1. Revenue Deficit

Revenue Deficit takes place when the revenue expenditure is more than

revenue receipts. The revenue receipts come from direct & indirect

taxes and also by way of non-tax revenue.The revenue expenditure

takes place on account of administrative expenses, interest payment,

defence expenditure & subsidies. It is currently 2.8% of GDP

2. Budgetary Deficit

Budgetary Deficit is the difference between all receipts and expenditure

of the government, both revenue and capital. This difference is met by

the net addition of the treasury bills issued by the RBI and drawing

down of cash balances kept with the RBI. The budgetary deficit was

called deficit financing by the government of India. This deficit adds to

money supply in the economy and, therefore, it can be a major cause of

inflationary rise in prices.

3. Fiscal Deficit

Fiscal Deficit is a difference between total expenditure (both revenue

and capital) and revenue receipts plus certain non-debt capital receipts

like recovery of loans, proceeds from disinvestment.

In other words, fiscal deficit is equal to budgetary deficit plus

governments market borrowings and liabilities. This concept fully

reflects the indebtedness of the government and throws light on the

extent to which the government has gone beyond its means and the

ways in which it has done so. It is currently 3.9% of GDP.

4. Primary Deficit

The fiscal deficit may be decomposed into primary deficit and interest

payment. The primary deficit is obtained by deducting interest

payments from the fiscal deficit. Thus, primary deficit is equal to fiscal

deficit less interest payments. It indicates the real position of the

government finances as it excludes the interest burden of the loans

taken in the past.

5. Monetised Deficit

Monetised Deficit is the sum of the net increase in holdings of treasury

bills of the RBI and its contributions to the market borrowing of the

government. It shows the increase in net RBI credit to the government.

It creates equivalent increase in high powered money or reserve money

in the economy.

INFLATION TRENDS IN INDIA:

We know that overtime prices fluctuate of every commodity. Inflation can be

defined as a rise in the general price level and therefore a fall in the value of

money. Inflation occur when the amount of buying power is higher than the

output of goods and services. Inflation also occurs when the amount of

money exceeds the amount of goods and services available.

Factors affecting inflation:

Supply side factors: the supply side factors are the key

ingredient for the rising inflation in India. The agricultural

scarcity or the damage in transit creates a scarcity causing high

inflationary pressures. Similarly, the high cost of labor eventually

increases the production cost and leads to a high price of the

commodity.

Demand side factors: Demand side factors are basically occurs

in a situation when the aggregate demand in the economy has

exceeded the aggregate supply. In the Indian context it occurs

with the agrarian society where due to droughts and floods or

inadequate methods for storage leads to lesser or deteriorated

output.

Domestic factors: There are some domestic factors also which

affect the inflation. In India we have lesser developed financial

market which creates a weak bonding between the interest rates

and the aggregate demand.

External factors: external factors include exchange rate

determination. The liberal economic perspective in India affects

the domestic price.

Effects of inflation:

Hoarding

Increased risk

Fixed income recipients

Lowers national saving

Illusions of making profit

Rising prices of imports

Causes business cycles to go out of business

Relationship between fiscal deficit and public debt:

Government sometimes cannot finance their budgets entirely using their

revenues alone, they have to borrow some money in order to do that. Such

money that is borrowed by the government to finance its operations is what is

referred to as public debt. Public debt can be borrowed from a number of

sources. One such source is local investors. Alternatively, the government

can borrow such money from other governments. If such debt is owed by a

country to another country, and if the money is given in form of foreign

currency, then such a debt in economics is referred to as a sovereign debt.

public debt is not a flow concept. It is a stock concept and hence measured at

a particular time i.e., end of the year. Intuitively, when fiscal deficit increases

government needs to borrow more money to balance the budget, therefore

increasing the public debt.

Relationship between fiscal deficit and Taxes A key problem with trying to balance the budget with tax increases is that

higher taxes fuel more spending. Milton Friedman explained the problem:

“Raise taxes by enough to eliminate the existing deficit and spending will go

up to restore the tolerable deficit.”Another reason that tax rate increases do

not succeeding balancing the budget is that they shrink the tax base by

reducing economic growth and spurring greater tax avoidance. As a result,

the government typically gains only a fraction of the revenues it hopes to

receive.

In the theory of economics according to the classical view, which is rooted in

the quantity theory of money , fiscal deficits cause inflation because

governments that run persistent fiscal deficits tend, over time, to resort to

money creation to finance the deficits. Normally, the budget deficit on its

own does not cause inflationary pressures, but rather affects the price level

through the impact on money aggregates and public expectations, which in

turn trigger movements in prices.

Relationship between Fiscal Policy And

Government Expenditure According to Keynesian approach, Government spending may increase the

aggregate demand which further stimulates the economic growth and

employment. Many studies show that government spending is positively

related with economic growth. While increase in government spending may

lead to fiscal deficit, but if government reduces their expenditure it may

adversely affect the economy. But the excess of government expenditure due

to the current expenses or unproductive use over the taxes collection capacity

of economy creates fiscal deficit.

A major part of expenditure is financed by the borrowings from several

sources like the world bank, IMF and other nations which constitute the fiscal

deficit.

Relationship between fiscal deficit and inflation:

Macroeconomic theory postulates that fiscal deficit cause inflation. A well-

established theory in macroeconomics is that fiscally dominant governments

running persistent deficits have sooner or later to finance those deficits with

money creation (seigniorage), thus producing inflation. The “fiscal view” of

inflation has been especially prominent in the developing country literature

like India, which has long recognized that less efficient tax collection (the

basic problem in Indian context), political instability, and more limited access

to external borrowing tend to lower the relative cost of seigniorage and

increase dependence on the inflation tax.

Reserve Bank of India (RBI) propagated a theory which says that there is

excess demand in the economy, leading to price rise. In other words, this is

„demand-pull inflation‟. That excess demand needs to be squeezed out of the

economy by reducing government spending and maintaining high interest

rate. This theory proved that the “fiscal view” of inflation is valid in India.

And hence, it can be concluded that there is a positive relationship between

fiscal deficit and inflation.

FISCAL POLICY The fiscal policy is basically the revenue generating policy of the

Government. Inflation and fiscal policy affects the level of economic

activities of a country. Fiscal policy is the Government's expenditure policy

that influences macroeconomic conditions.

The government finances expenditures on the basis of this fiscal policy. The

two methods of financing are

Taxation- Taxation can be of several forms like taxation of personal

and corporate income, value added taxation and the collection of

royalties

Borrowing- A government not having sufficient tax revenue to finance

its expenditure, borrows money to provide goods and services to it's

people. The government borrows money through the issuance of

securities.

In India growing deficit, not only deserves concern, but the composition of

this deficit and the way it is being financed deserve concern because, the

impact of fiscal deficit depends on it.

Growing revenue deficit in India is a major concern because more and more

revenue deficit implies pre-emption of private saving for government current

consumption which tends to crowd out private investment without

corresponding increase in capital spending by the government. It is also

recognized that since the 1990s primary deficit has turned negative, implying

that states are borrowing to meet their current expenditure or significant part

of the fiscal deficit is due to the burden of the serving the past debt.

Widespread deterioration in fiscal position with associated impact on fiscal

sustainability, macroeconomic vulnerability and economic growth led an

emerging, consensus to adopt fiscal reform to improve fiscal responsibility.

In 2003 the Central Government of India enacted Fiscal Responsibility and

Budget Management (FRBM) Act on the presumption that fiscal deficit is the

key parameter adversely affecting all other macroeconomic variable. It put

statutory ceilings on Central Government‟s borrowings, debt and deficits.

Now all the major States have enacted Fiscal Responsibility Law except West

Bengal and Sikkim.

Impact of fiscal policy is on

Economic effects of fiscal policy

The fiscal policy has the power to affect the level of overall demand in the

economy. The primary objective of fiscal policy is to

Maintain the price stability,

Economic growth

Employment of the country.

An appropriate fiscal policy can help in combating rising inflation

rates.

1• interest rates,

2• tax rates.

3• government spending strategy.

RESEARCH QUESTION AND HYPOTHESIS

There is no agreement among economists either on the methodological

grounds or on the basis of empirical results whether financing government

expenditure by incurring a fiscal deficit is good, bad, or neutral in terms of its

real effects

Based on the neoclassical perspective, we are able to come to the point that,

if economic resources are fully employed, increased consumption necessarily

implies decreased saving. Interest rates must then rise to bring capital

markets into balance. Thus, persistent deficits crowed out private capital

accumulation.

Hypothesis (conjecture) formulation:

In general, inflation has raising effect on budget deficit by raising nominal

interest rate. According to Fischer Effect, nominal interest rate consists of

real interest rate and expected inflation rate. If the inflation expectation

increases, it causes to rising nominal interest rate which leads to the public

debt to go up. Interest payment covers the big part of public payment in

developing countries. If interest rate increases because of inflation, it leads to

raise interest payment as well as budget deficit by causing the Debt/GDP

REGRESSION EQUATION:

( Fiscal Deficit)t= α+β1 (Inflation)t+β2 (tax) +β3 (Government

Expenditure) + β4(Public Debt)

H10 : β1 = 0(There is a no impact of inflation or cpi on Fiscal deficit)

H11: β1> 0 (Inflation increases fiscal deficit i.e there is a positive

impact of inflation on Fiscal deficit.)

ratio to increase and thereby increases fiscal deficit. There are many other

channels through which inflation influences the real budget deficit.

Ironicall, Şen (2003) found that high inflation cause to decrease in tax

revenue in crisis time and low level of tax revenue cause to tax loss which

leads to high budget deficit.

In general, increase in government expenditure (either because of operation

of Wagner‟s law or otherwise) will increase fiscal deficit if revenue is not

generated in the same proportion. However, there are other reasons also due

to which government expenditure can increase fiscal deficit even after raise

in tax revenue due to deficient and inefficient social programs. Further,

increasing public spending leads to increase in budget deficit. This

disequilibrium results from governments‟ wrong policies such as using

borrowing in order to finance the deficit.

H30 : β3 = 0. (There is a no impact of government expenditure on Fiscal

deficit)

H31: β3> 0 (There is a positive impact of government expenditure on

Fiscal deficit deficit)

H20 : β2 = 0. (There is a no impact of taxes on Fiscal deficit)

H21: β2< 0 (TAXES reduces fiscal deficit i.e there is a negative impact

of taxes on Fiscal deficit deficit)

Public borrowing can thus offset the rise in saving and fall in spending which

threatens a recession. Intuitively, when fiscal deficit increases government

needs to borrow more money to balance the budget, therefore increasing the

public debt. Also as the public debt increases an increased amount of interest

has to be paid for the increased borrowing. This further leads to an increase in

the amount to be borrowed to finance the public debt. Hence public debt

forms an important part of fiscal deficit analysis.

This hypothesis is tested to establish the usefulness of the model used for the

empirical analysis. It also establishes whether the explanatory variables

(government expenditure, taxes, inflation and public debt) explain a

significant portion of the variation in the fiscal deficit. If the null hypothesis

is rejected then it means the model is a good fit. If it‟s not rejected it means

the model is useless and a new model needs to be found.

H40 : β4 = 0 (There is a no impact of public debt on Fiscal deficit)

H41: β4> 0 (Public debt increases fiscal deficit i.e there is a positive

impact of taxes on Fiscal deficit.)

H50 : R square = 0 (All the variables does not explain a significant

portion of variation in the fiscal deficit. The model is useless)

H51: R square> 0 (All the variables collectively explain a significant

portion of the variation in Fiscal Deficit.)

This hypothesis is tested to find out whether Uis of the variables in the study

are normally distributed or not. If the H60 is accepted then Ui‟s are normally

distributed if H60 is rejected then Ui‟s are not normally distributed . If the

Ui‟s of a variable is normally distributed then the variable‟s distribution will

also be normally distributed.

H60 : JB = 0 ( The variable‟s Ui‟s has a normal distribution )

H61: JB> 0 (Variable‟s Ui‟s does not have a normal distribution)

DATA AND METHODOLOGY

DATA ANALYSIS METHOD

Various statistical methods have been employed to compare

the data. Descriptive statistics used to test the sample characteristics. Time

series analysis was also carried out to identify the trends over the last forty

years. It includes regression analysis, Correlation analysis and independent

sample one-way ANOVAs (f-test). Regression analysis is used to find out the

significant impact of government expenditure, inflation, taxes and public debt

on fiscal deficit.( Eviews - 5 versions have been utilized in this study

We have used a multiple regression process for exploring the relationship of

four predictive variables as they relate to the dependent variable of this

quantitative study along with checking the two variable models.

TREND ANALYSIS OF FISCAL DEFICIT

In the initial years FD of our country was very low, while subsequently in

recent years it can be seen that fiscal deficit is way to higher prevalent in the

country. This can be attributed to be for many reasons further analyzed in the

0

1000

2000

3000

4000

5000

6000

75 80 85 90 95 00 05 10

FD

term paper as increase in prices (inflation),increase in government

expenditure as compared to taxes over the years leading to deficit and also

due to increase in public debt which means increase in borrowing leading to

an increase in payments.

GRAPH SHOWING THE INFLATION TRENDS

ANALYSIS: As the graph is showing the inflation is highly fluctuating in

India. “As growth is not uniform in different growth sectors, maintaining

absolute price stability meaning zero rate of increase in prices, may not be

possible and nor it is desirable.”

Inflation is highest in year 1998 which is 15.37%. Current inflation in India is

around 5.5% driven by higher food prices. Inflation rate in India averaged

8.78% from 2012 to 2015, reaching on all time high of 11.16% in November

of 2013 and a record of 4.38% in November of 2014. Inflation rate in India

is reported by the Ministry of Statistics and Programme Implementation

(MOSPI), India.

0

4

8

12

16

94 96 98 00 02 04 06 08 10 12

INF

CPI AND FD TRENDS OVER THE YEARS

Refer: Table 3 in appendix

In the initial years inflation was higher than FD of our country, while

subsequently in recent years it can be seen that fiscal deficit is way to higher

than the cpi prevalent in the country. The fluctuation in FD has been more as

compared to that of fiscal deficit. But still both variables are moving in the

same direction, a sharp dip in CPI is accompanied by a dip in FD too, while

as FD has started increasing, cpi has also increased.

FISCAL DEFICIT AND CPI

As the scatter plot is showing there is almost a positive relationship between

inflation and fiscal deficit. As the CPI is higher for the corresponding years

FD has also been high. In no year we see a drop in FD accompanied by a rise

in CPI and vice versa.

This graph shows the fitted sample regression line for the data taken. It has a

slight positive slope. As the conditional mean values of FD for given values

of CPI is quite far it can be stated that this model value is not a quite good

one.

SCATTER PLOT OF FISCAL DEFICIT AND PUBLIC DEBT

As the scatter plot is showing there is no perfect relationship between public

debt and fiscal deficit. However later on when we include other variables to

the model we will see that public debt affects the fiscal deficit jointly with

other variables.

2

3

4

5

6

7

8

40 45 50 55 60 65

PD

FD

LINE GRAPH OF FISCAL DEFICIT (FD) AND PUBLIC DEBT(PD)

Refer: Table 3 in appendix

Similarly, line graph of fiscal deficit and public debt does not show a perfect

relationship between them. However if we do the analysis of public debt of

past few years, public debt is highest in year 2003 i.e., 61.5% and lowest in

2012 i.e., 43.7%. a similar analysis for fiscal deficit shows that fiscal deficit

is highest in 1994 and lowest in 2008.

0

10

20

30

40

50

60

70

92 94 96 98 00 02 04 06 08 10 12

FD PD

FISCAL DEFICIT AND GOVERNMENT EXPENDITURE

Refer: Table 2 in appendix

We can clearly find a huge fluctuation in the fiscal deficit of India in the 39

observations taken. This might be due to political instability and market

fluctuations. The Government expenditure is less varied vis-à-vis fiscal

deficit in the 34 years. The highest government expenditure was observed in

the financial year of 2013-14 when a new Government came into power and

the lowest in 1975-76.The new Government in its budget has targeted to keep

the fiscal deficit under control by curtailing it’s certain expenditures like in

health and education.

0

10000

20000

30000

40000

50000

60000

70000

Fiscal D.

govt exp

SCATTERPLOT OF FISCAL DEFICIT & GOVERNMENT EXPENDITURE

We cannot find a perfect relationship between fiscal deficit and government

expenditure, which is required to avoid the problem of multi-colinearity.

There is a positive relationship between government expenditure and fiscal

deficit as per our empirical analysis.

FISCAL DEFICIT AND TAXES

Refer: Table 1 in appendix

0

10000

20000

30000

40000

50000

60000

70000

0 10 20 30 40 50

Fiscal D.

govt exp

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Fiscal D.

taxes

We can find a positive relationship between fiscal deficit and taxes but

not perfect relationship. Both the fiscal deficit and taxes are found to be

highest in the year 2013-14.

SCATTER-PLOT: (FISCAL DEFICIT AND TAXES)

Since there seems to be no perfect relationship between the two variables.

But the relationship is positive as per our graphical analysis. As fiscal deficit

increases the taxes have also been increasing. In no year has this positive

relationship seen a deviation.

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

0 10 20 30 40 50

Fiscal D.

taxes

DESCRIPTIVE STATISTICS The distribution of the 2 data sets can be well seen graphically by the bar

chart diagram.

FISCAL DEFICIT AND CPI

CPI ON FD

Comparatively standard deviation is quiet less than that of fiscal deficit.

Hence it can be stated that over the years fluctuation in inflation has not been

as drastic as that with fiscal deficit about it‟s mean expected value.

Jarque Bera

This statistic can be used to test a null hypothesis where each variable is

considered to have a normal distribution.

The results in the table show that the data do not support the supposition that

each variable has a normal distribution, since the null hypothesis that each

variable has a normal distribution is rejected based on a p-value 0.0000

This is also evident from the fact that neither the skewness of the data is near

0 nor is the kurtosis of either near 3. So H60 : JB = 0 is accepted for CPI and

FD.

Both of the distribution is slightly positively skewed this is evident from the

the Bar Graph as well as the co-efficient (+1.3688118 and +1.712191)

H60 : JB = 0 ( The variable has a normal distribution )

H61: JB> 0 (Variable does not have a normal distribution)

There is a positive correlation between FD and CPI this is consistent with our

theory of a positive relationship between the two.

The covariance is high between inflation and FD is also high as much as

6355.

Fiscal Deficit and Government Expenditure:

We see that the mean of fiscal deficit is 1095.355 approximately with a

remarkable variation of 1511.907. The mean value of Government

Expenditure is 14066.79 in India which is quite high. And the variation

observed is equivalent to 16872.

FISCAL DEFICIT AND TAXES

We find that the mean value of fiscal deficit in the 39 years is 1095.35

whereas that of tax revenue is about 1692.44.

govtexp 39 14066.79 16872.1 683.14 64850.37 fiscald 39 1095.355 1511.907 13.64 5160.42 Variable Obs Mean Std. Dev. Min Max

taxes 39 1692.435 2216.942 60.1 8360.26 fiscald 39 1095.355 1511.907 13.64 5160.42 Variable Obs Mean Std. Dev. Min Max

The variation found in fiscal deficit is around 1511.907 whereas in case of

taxes we can see a huge variation of 2216.94 mainly due to economic growth

and political instability. The highest tax collected was 8360 in 2013-14

financial year.

FOR MULTIPLE VARIABLE

THE DISTRIBUTION OF THE SETS CAN BE INTERPRETED

AS:JARQUE BERA

The result for CPI and FD have already been explained above.

The results in the table further shows that government expenditure, and tax

revenue are not normally distributed at all levels of significance

(H60 : JB = 0 rejected at 5%, 1 % and 10%)

But public debt is normally distributed at any level of significance.

The coefficients except for the case of public debt show correct sign.

(H60 : JB = 0 excepted at 5%, 1 % and 10%)

This may be due to the presence of multi- co- linearity.

Date: 03/19/15

Sample: 1980 2012

CPI GE FD PD TR

Mean 569.7576 14535.99 1135.101 68.10273 1735.662 Median 513.0000 9286.290 463.9400 68.85000 937.0100 Maximum 1381.000 57720.60 5141.030 83.23000 7418.770 Minimum 256.0000 1180.680 45.91000 47.94000 93.58000 Std. Dev. 294.6317 15158.34 1419.770 8.917924 2008.870 Skewness 1.250182 1.393295 1.699976 -0.528365 1.415995 Kurtosis 3.756496 4.112396 4.742455 3.074065 3.894997

Jarque-Bera 9.383152 12.37846 20.06926 1.542974 12.12913 Probability 0.009172 0.002051 0.000044 0.462325 0.002324

Observations 33 33 33 33 33

CORRELATION MATRIX

The correlation matrix gives a great view on the relationship shared

between variables. Our empirical analysis shows that

There is negative relation between CPI and FD here and even with

government expenditure. Also there is negative relation between public

debt too here with CPI. This may be because here CPI is independent

variable which leads to does not comply with the theory.

While with FD there is positive relation between government expenditure

and Public debt. In detail

CPI has

a. A negative relationship with FD (-0.13495)

b. A negative relationship with Government expenditure (-0.176565)

c. A negative relationship with Public Debt (-0.026624)

d. A negative relationship with Tax Revenue (-0.158494)

Fiscal Deficit has

a. A negative relationship with Government expenditure (0.9695)

b. A negative relationship with Public Debt (0.0227)

c. A negative relationship with Tax Revenue (0.94)(this contradicts our

theory as ideally the relationship is expected to be positive)

CPI FD GE PD RESID TR

CPI 1.000000 -0.134952 -0.176565 -0.026624 7.72E-15 -0.158494 FD -0.134952 1.000000 0.969532 0.227698 0.198023 0.949771 GE -0.176565 0.969532 1.000000 0.295014 4.83E-15 0.992024 PD -0.026624 0.227698 0.295014 1.000000 6.76E-15 0.258252

Government expenditure has

a. A negative relationship with Public Debt (0.295)

b. A negative relationship with Tax Revenue (0.99) ( It is because of this

issue that we might face the issue of multi-co-linearity further)

COVARIANCE MATRIX

The Covariance comes from correlation and so it can be seen it has complied

with the above correlation. It shows the same relation as above and tells one

how one variable varies with another.

CPI FD GE PD TR

CPI 84177.27 -54740.87 -764665.0 -67.83570 -90966.03 FD -54740.87 1954664. 20233343 2795.608 2626786. GE -764665.0 20233343 2.23E+08 38671.71 29292838 PD -67.83570 2795.608 38671.71 77.11940 4486.370 TR -90966.03 2626786. 29292838 4486.370 3913269.

RESULT AND ANALYSIS

REGRESSION OF FISCAL DEFICIT (REFER TO R1 IN APPENDIX)

If we regress fiscal deficit on Government expenditure, the p value of F-

statistic is coming to be 0.00.So we can reject the null hypotheses at any level

of significance. And hence our findings are significant.

Also, we can notice the relationship between fiscal deficit and Government

Expenditure using the value of R squared of 0.95.This means 95% variation

in fiscal deficit is being explained by government spending. We need to take

more variables in to consideration while describing this model.

REGRESSION OF FISCAL DEFICIT ON PUBLIC DEBT INTERPRETATION (R2

IN APPENDIX)

When we regress fiscal deficit on public debt, the p-value of F-statistic is

0.083 so we can reject the null hypothesis at 10% significance level.

And hence, our findings are significant at 10% level. The r-

squared(0.142) and adjusted r-squared(0.099) values show that there is a

weak relationship between fiscal deficit and public debt. And hence one

of the possible reasons for it may be that our model is not correctly

specified.

REGRESSION EQUATION:

( Fiscal Deficit) = -134.8355 + 0.087454(Government Expenditure)

REGRESSION EQUATION:

( Fiscal Deficit) = 9.130019 - 0.0732300 (Public Debt)

INTERPRETATION OF FISCAL DEFICIT AND TAXES (R3)

If we regress Fiscal deficit on taxes, we get a p-value of F-statistic equal

to 0.00 which is extremely low and so we can reject the null hypotheses

as any three level of significance. Thus our findings are statistically

significant at any of the three level of significance. The value of R

squared is 0.92, it means 92% variation in fiscal deficit is being

explained by taxes. Hence in order to increases our R square we need to

add more relevant variables impacting fiscal deficit.

INTERPRETATION OF FD ON CPI (R4)

The study regress FD on CPI to find out impact of CPI on deficit in India.

The model uses OLS technique. The results can be interpreted as follows.

Durbin-Watson (DW) statistic( test of 1st order serial co-rrelation) ---

The DW statistics is 0.093813 ,which means there is presecnce of auto

correlation in the error term.

The R-squared value is 0.000229, which states that CPI individually

can explain only 0.0229% of variation in Fiscal Deficit. Hence it would

be rightful to state that inflation is alone not a major cause of higher

fiscal deificit.

REGRESSION EQUATION:

( Fiscal Deficit) = -15.18406 - 0.656178 (tax)

REGRESSION EQUATION:

(Fiscal Deficit) = 1051.747 + 0.080328(Inflation)

The constant term is 1051.747which states that if there is zero inflation

in the economy then Fiscal Deficit would still be 1051.747 on an

average.

The t-statistic is the reported t-value corresponding to the null hypothesis that

c(i) = 0 for i = 1, 2. Based on this calculated value and appropriate critical

values from the t-table, we will either reject or fail to reject the null

hypothesis at some chosen level of significance. The p-values provide us with

an alternative way of testing this null hypothesis.

The null hypothesis that this constant is 0 can be rejected at even 5%

level of significance as the probability value of it‟s “t-statistic” is

0.0561. Hence this constant value will always be significantly different

from zero.

The estimated co-efficient of CPI is positive (0.080328), Economic

theory suggests that this is what we should expect. Inflation has a

positive impact on FD (as inflation grows deficit of economy.)

This also states that a 1 point increase in inflation would lead to a

0.080328 points increase in Fiscal Deficit on an average.

Note: In EViews the p-values for this t-test assumes a two-sided alternative

hypothesis, so these values should be halved if you have a one-sided

alternative. Hence we follow a 1 tail test as the economic theory states our

alternative hypothesis ( for inflation and cpi) has to be a 1 sided test.

Hence the probability value of “t-statistcs” of CPI is seen to be 0.46.

This states that we can reject the null hypothesis that inflation‟s impact

on FD is not significance even at 1% level of significance.

INTERPRETATION OF CPI ON FD (R5)

The study regresses CPI on FD to find out impact of deficit on the inflation

and general price level in India. The model uses OLS technique. The results

can be interpreted as follows.

Durbin-Watson (DW) statistic( test of 1st order serial co-relation) ---

The DW statistics 0.450843,which means there is presence of auto

correlation in the error term.

The R-squared value is 0.000229, which states that FD individually

can explain only 0.0229% of variation inflation. Hence it would be

rightful to state that FD is alone not a major cause of higher inflation.

The constant term is 539.7459which states that if there is zero FD in the

economy then CPI would still be 539.7459on an average.

The null hypothesis that this constant is 0 cannot be rejected at 5%

level of significance as the probability value of it‟s “t-statistic” is

0.0000. Hence this constant value will not be significantly different from

zero.

The estimated co-efficient of FD is positive (0.002854), Economic theory

suggests that this is what we should expect. FD has a positive impact

on Inflation (as inflation grows deficit of economy.)

This also states that a 1 point increase in FD would lead to a 0.002854

points increase in inflation on an average.

We again follow a 1 tail test as the economic theory states our alternative

hypothesis ( impact of FD on inflation should be positive) . So it has to be a 1

sided test.

REGRESSION EQUATION:

(Inflation) = 539.745 + 0.002854 (Fiscal Deficit)

Hence the probability value of “t-statistcs” of FD is seen to be 0.46.

This states that we can reject the null hypothesis that inflation‟s impact

on cpi is not significance even at 1% level of significance.

And hence our result shows that inflation does impact fiscal deficit but as the

amount of variation explained by it is really low we need to add more

variables to our model. Possibly we have to solve a specification bias issue in

our model.

INTERPRETATION WHEN FD AS DEPENDEND VARIABLE (MULTIPLE

REGRESSION (R6)

The general purpose of multiple regressions is to learn more about the

relationship between several independent or predictor variables and a

dependent or criterion variable

The study regress FD on CPI, GE,,PD, and TR to find out impact of all these

variables on deficit in India. The model uses OLS technique. The results can

be interpreted as follows.

Dependent Variable: FD Method: Least Squares Sample: 1980 2012 Included observations: 33

Variable Coefficient Std. Error t-Statistic Prob.

CPI 0.280124 0.185327 1.511507 0.1419 GE 0.191776 0.029766 6.442810 0.0000 PD -16.70020 6.522082 -2.560562 0.0161 TR -0.738632 0.221396 -3.336243 0.0024 C 607.1922 433.3843 1.401048 0.1722

R-squared 0.960787 Mean dependent var 1135.101 Adjusted R-squared 0.955185 S.D. dependent var 1419.770 S.E. of regression 300.5597 Akaike info criterion 14.38790 Sum squared resid 2529412. Schwarz criterion 14.61464 Log likelihood -232.4003 F-statistic 171.5108 Durbin-Watson stat 1.548943 Prob(F-statistic) 0.000000

RESULT :

Dependent

Variables

Sign of

Coefficient

s

Value of

coefficients

T-values

( for

testing H0 )

Comparing

with studied

theory

relation

HypothesisTes

ting (Null

Hypothesis Ho)

CPI + 0.2801

(0.1419)

(0.07095) *

Positively

Related

NOT

Rejected at 1%,

5%

Rejected at

10%

GE + 0.0297

(0.0000)

(0.0000)

***

Positively

related

Rejected

PD - -16.700

(0.0161)

(0.00805)

***

Positively

related (In

this case

negatively

related)

Rejected at all

Level of

significance

TR - -0.7386

(0.0024)*

(0.0012)

***

Negatively

Related

Rejected

At all levels

Note: In parenthesis is the P value of the coefficients.

T- values for H0 testing have been written separately as alternative

hypothesis is single tailed.

One star has been used for stating that hypothesises significant at 10%,

2 star has been used for stating that hypothesises significant at 5%

3 star has been used for stating that hypothesises significant at 1%

REGRESSION EQUATION:

( Fiscal Deficit)t= 607.1922 + 0.2801 (Inflation)t -0.7386 (tax) +

0.0297 (Government Expenditure) + -16.700 (Public Debt)

Interpreting the direction of the relationship between variables:

The intercept value is 607.1922 which means that if inflation, taxes,

government expenditure and public debt were all zero still there would

persist a fiscal deficit of 607.1922. While this case is unlikely to be possible.

Here, we can see that since FD and CPI are positively related due to the

positive sign of coefficient CPI, it can be interpreted, that as CPI

increases by 1 unit average value of FD increases by 0.2801 keeping

government expenditure taxes, and public debt constant.

Similarly is as government expenditure increases by 1 unit average

value of FD increases by 0.0297 units holding the other factors used in

study constant. This complies with the theory.

While Public debt and Taxes are negatively related to FD as can been

seen by negative sign of their coefficient. As taxes increases by 1 unit,

average value of FD decreases by 0.7386 units and same is the case

with Public Debt.

The relation of FD with The Taxes complies with the theory studied

while Public debt does not correlate with the studied theory. There

should be positive relation between FD and public debt. As Public debt

increases, interest payment increases too and so deficit should also

increase. But our model and analysis contradicts this theory. One of the

reasons can be existence of multi-collinearity that affects positive

negative relation.

Durbin-Watson (DW) statistic---The DW statistics is 1.548943,which

means there is no presence of auto correlation in the error term.

The R-squared value is 0.960787, which states that all the independent

variables can explain 96% variation in Fiscal Deficit. Hence it would

be rightful to state that these variables can be the major cause of higher

fiscal deficit. And we have almost added all significant factors.

The regression further shows that more amount of absolute impact on

fiscal deficit is of Public Debt, then taxes, then inflation and lastly

government expenditure. Hence government expenditure is causing the

least amount of absolute change in fiscal deficit.

Also over the years the taxes have played a significant role in

negatively impacting fiscal deficit as the co-efficient (0.7) is too high.

The adjusted R2 is used to compare two or more regression models that

have the same dependent variable, but differing numbers of regressors.

The adjusted R square is 0.955 which is quite high and has increased as

compared to all the 2 variable linear regression run, hence it is better

explaining the variation in fiscal deficit than the 2 variable linear

regression regimes.

The p-values as it tells the lowest significance level at which null

hypothesis can be rejected.

The hypothesis testing has been explained in detail in the table and

hence we conclude that these values will always be significantly

different from zero as P value is small at 10% level of significance.

Hence our findings are statistically significant at 10% level of

significance.

Test of usefulness of the model :-

H50 : R square = 0 (All the variables does not explain a significant

portion of the fiscal deficit. (The model is useless)

H51: R square> 0 (All the variables collectively explain a significant

portion of the variation in Fiscal Deficit.)

The test statistics uses F value. As the p-value of this F- statistics is

already calculated and we have it as 0.000

The rule is to reject H50 : R square = 0 if p- value of F statistics is less

than level of significance.

Hence at even 1% level of significance we reject this hypothesis. Hence

as a result we can state that all the variables( taxes, government

expenditure, public debt and cpi collectively explain a substantiall

proportion of the variation in fiscal deficit. And the developed model is

quiet usefull

ANALYSING CERTAIN

TRENDS OF FISCAL

POLICY IMPACT ON

THE DIFFERENT

VARIABLES

FISCAL POLICY OF INDIA- A BRIEF ANALYSIS Fiscal deficit as a proportion of GDP has emerged as a key indicator to

measure the fiscal health of a country. Fiscal Deficit is measured as the

difference between aggregate disbursements and revenue and non debt

capital receipts. Fiscal deficit summarizes in a way the total range of public

finances covering expenditure and revenue.

Therefore a limit on fiscal deficit has been put. Continued high fiscal

deficit are concern for several reasons.

This dis-empowers the government fiscal stance by pre-empting

larger The standard deviation is really large which shows the fiscal

deficits over the years have varied drastically from the expected mean

of the distribution. So data is quiet spread out. Hence the level of

skewness and peakedness of the data is also more share of public

resources for debt servicing there by leaving that much less for

desirable expenditure such as physical infrastructure (e.g. roads,

power) and social infrastructure (e.g. education and health). This

leads to declining ratio of capital expenditure to total expenditure

as seen over the period 1990-91 to 2002-03 in the case of India.

Continued fiscal deficit impact on interest and inflation rates

depending on how the deficits are financed. If the government

borrows in the domestic market, it puts pressure on the interest rate.

If the government finances the deficit by creating high power money,

it fuels inflation. In India’s case since deficits are financed by

open market borrowing, albeit through a preferential

Statutory Liquidity Ratio window, the risk is largely of

government borrowing leading to higher interest rate. Mere

limiting of its size alone may not yield the required result.

The impact of fiscal deficit depends upon the composition of

the fiscal deficit and the way it is being financed.

In India fiscal policy rule is not a new concept. For more than fifty years

since the inception of the constitution, government debt and borrowing

programmes for the central as well as the state governments in India were

managed without any explicit targets or rules except for the constitutional

provisions under articles 292 and 293. Apart from this the governments of

India time to time have taken different fiscal incentives to inculcate fiscal

discipline.

The improvement in States finances during the recent years owes a great

extent to the various fiscal reforms, viz.,

Implementation of FRLs

Introduction of VAT

Imposition of new taxes

Measures to improve tax administration

Measures aimed at limiting non-development expenditure, etc.

The larger devolution and transfer of resources from the Central

Government backed by strong macroeconomic growth also aided the fiscal

correction and consolidation process at the States Government level.

Adjustment in Central Government Finances, 2003-2009-10

(as per cent of GDP Indicators 2003/

4 2004/

5 2005/

6 2006/

7 2007

/8 2008/9(R

E) 2009/10(B

E) 1. Revenue

Receipts (a+b) 9.6 9.7 9.7 10.5 11.47 10.56 10.49 (a) Tax Revenue

(net of States Share) 6.8 7.1 7.5 8.5 9.3 8.76 8.10 (b) Non Tax revenue 2.8 2.6 2.2 2.0 2.2 1.8 2.4 2. Revenue Expenditure

13.1 12.2 12.3 12.4 12.6 15.1 15.3

(a) Interest Payments 4.5 4 3.7 3.6 3.6 3.6 3.8 (b) Major Subsidies 1.61 1.46 1.32 1.38 1.50 2.43 1.90 3.Revenue Deficit (2-1)

3.6 2.5 2.6 1.9 1.1 4.53 4.83

4. Capital Expenditure 3.96 3.62 1.85 1.67 2.50 1.83 2.11

5.

To Total Expenditure (2+4)

17.1 15.8 14.11 14.13 15.1 16.93 17.43

6.

Fiscal Deficit 4.5 4 4.1 3.5 2.7 6.14 6.85

8.

Primary Deficit -0.03 -0.05 -0.38 -0.19 -0.93 2.5 3.00

9.

Outstanding Liabilities

63.05 63.33 63.13 61.23 60.07 58.93 59.68

Source- “Report of the Thirteenth Finance commission”,

The fiscal deficit of the centre declined from 4.48 percent of GDP in

2003-04 to 2.69 percent in 2007-08, the lowest since 1990-91. There was a

reversal of the declining trend in 2008-09, with the fiscal deficit ballooning

to 6.14 percent of GDP. For 2009-10, it has been budgeted at 6.85 percent

of GDP.

By looking into the data we can say that the improvement in fiscal deficit

indicators at central level is due to improvement in revenue receipts (tax

receipts) and mainly due to expenditure cut. It can be observed that at central

level among expenditure there is a heavy deterioration in the capital

expenditure, where as among revenue expenditure (like interest payments,

pension) there are not much changes. Fiscal Policy Rules should also take

capital expenditure as a major indicator of growth and priority should be

given for increasing this expenditure rather than cutting it off in the fiscal

consolidation process. Target variables should be chosen in such a way that

social sector and capital spending do not suffer in the course of adjustment.

States‟ Government Aggregate: Fiscal Adjustment 2003/04-2008/09

2008/9 2009/10 Indicators 2003/4 2004/5 2005/6 2006/7 2007/8 (BE) (RE) I. Total Revenue 11.2 11.5 11.99 12.9 13.2 13.87 13.6 A. State own Revenue 7 7.25 7.24 7.73 7.70 7.70 7.60 i). State Own Tax 5.6 5.8 5.9 6.1 6.07 6.21 6.27 ii). State Own Non Tax 1.4 1.47 1.3 1.62 1.63 1.50 1.33 B. Transfers from Centre 4.1 4.2 4.7 5.2 5.5 6.16 6

i). Tax Share 2.4 2.5 2.65 2.9 3.2 3.26 3.17

2. Grant in Aid 1.7 1.7 2.1 2.27 2.29 2.9 2.83 II. Revenue Expenditure 13.5 12.7 12.2 12.2 12.3 13.6 14.09

III. Capital Expenditure 1.88 2.14 2.32 2.47 2.8 2.6 IV. Revenue Deficit 2.3 1.2 0.19 -0.77 -0.94 -0.27 0.5 V. Gross Fiscal Deficit 4.4 3.4 2.56 1.69 1.51 2.64 3.23 VI. Primary Deficit 1.5 0.65 0.2 -0.6 -0.61 0.68 1.28

VII. State Government

Outstanding Liabilities 33.2 32.7 32.6 30.2 27.8 27.27 Na VIII. State Government

Outstanding Guaranties 7.5 8 6.5 5.5 3.7 Na

It can be seen from the above data that the State Governments may pursue

their efforts for improving revenue collection from non-tax resources,

ensuring the quantity and quality of major expenditure heads, reducing

recourse to borrowed funds for financing expenditure and enhancing

devolution of resources to the local Government level.

Contingent liabilities should be capped, but in addition off budget borrowing,

where debt serving will fall to government, should be consolidated with on

budget borrowing.

HENCE BY COMPARING BOTH THE DATA WE HAVE GOT The improvement at central level is due to slight improvement in revenue

receipts (tax receipts) and mainly due to expenditure cut. It can be observed

that among expenditure there is a heavy deterioration in the capital

expenditure, where as among revenue expenditure (like interest payments,

pension) there is not much changes.

Fiscal Policy Rules should also take care of capital expenditure as it is a

major indicator of growth and priority should be given for increasing this

expenditure rather than cutting it off in the fiscal consolidation process.

Target variables should be chosen in such a way that social sector and

capital spending do not suffer in the course of adjustment

CONCLUSION

Hence we reject the following all hypothesis at 10% level of significance.

H10 : β1 = 0 (There is a no impact inflation or cpi on Fiscal deficit)

H20 : β2 = 0. (There is a no impact inflation or cpi on Fiscal deficit)

H30 : β3 = 0 (There is a no impact inflation or cpi on Fiscal deficit)

H40 : β4 = 0 (There is a no impact inflation or cpi on Fiscal deficit)

H50 : R square = 0 (All the variables does not explain a significant

portion of the fiscal deficit. The model is useless)

So we can conclude that - WE EXCEPT

H11: β1> 0 (Inflation increases fiscal deficit i.e there is a positive impact

of inflation on Fiscal deficit.)

H21: β2< 0 (TAXES reduces fiscal deficit i.e there is a negative impact of

taxes on Fiscal deficit deficit)

H31: β3> 0 (There is a negative impact of taxes on Fiscal deficit deficit.)

H41: β4> 0 (Public debt increases fiscal deficit i.e there is a positive

impact of taxes on Fiscal deficit.)

H51: R square > 0 (All the variables collectively explain a significant

portion of the variation in Fiscal Deficit.)

REGRESSION EQUATION:

( Fiscal Deficit)t= 607.1922 + 0.2801 (Inflation)t -0.7386 (tax) +

0.0297 (Government Expenditure) + -16.700 (Public Debt)

This study was conducted in Indian perspective, especially on the fiscal

deficit and economic growth. Data on the fiscal deficit and economic growth

from the year 1980 to 2010 were collected for the study purpose.

The purpose of this paper was to show that there is a two-way relationship

between inflation and government budget deficit.

The link between Budget deficit, and Inflation is a universal phenomenon

and it is peculiar to every government in the world. In other words, while

government budget deficit may cause higher inflation, government

expenditure and revenue and therefore government budget deficit is itself

affected by the inflationary process. Therefore, inflation and budget deficit

are both considered as endogenous variables. It is shown that although in

general there may be some ambiguity with respect to the effect of budget

deficit on inflation and vice versa, but as far as the features of public sector

economics in most developing countries are concerned, we have presented

that higher budget deficit causes monetary base to increase and this, by

increasing money supply raises the rate of inflation. Similarly, as a result of

higher inflation, budget deficit increases therefore the process of self-

generating inflation continues as long as budget deficit is not being

eliminated.

The empirical part of this paper, by concentrating on the case of the supports

the above hypothesis. It has been witnessed that over the years particularly

in the last decade not only burden of fiscal deficit has increased but also

mounting inflation rate. Government expenditure has also increased the

pressure of the burden on Central government.

Result obtained from empirical analysis shows that the important variables

which are affecting fiscal deficit is increasing inflation and taxes while

government expenditure does not count. Our analysis of relationship between

public debt and fiscal deficit has come quite opposite to that of the underlying

economic theory.

The fiscal policies which have actually led to the improvement in fiscal

deficit indicators at central level is due to improvement in revenue receipts

(tax receipts) and mainly due to expenditure cut.

Therefore, to analyses this issue in depth one can combat with the

strategy of the wrong sign we can convert the model to a log-log model

or use lag values of the used variables to combat with the problem of

multi-co linearity. One can further go for empirical analysis in this

direction for India and extended the present study by analyzing the

impact of different types of government expenditure and Consumer Price

Index (CPI) on fiscal deficit which may give more insights about the

problem.

CERTAIN FINDINGS BEFORE WE MAKE

OUR RECOMMENDATION Recently the budget 2015 was announced.

The budget of the country is one of the key determinants of previous years,

and upcoming years fiscal deficit, inflation and the corresponding fiscal and

monetary policy undertaken to combat it. Hence we make an attempt to

analyse the fiscal policy undertaken to combat the current fiscal deficit along

with the growing inflation.

Eyeing the highlights of Economic Survey 2015

An attempt has been made to make a summarised version of the the

performance of our country in the previous years in the segments of inflation,

fiscal deficits, the fiscal health, infrastructure etc.

INFLATION, GROWTH

Evidence shows India recovering, but not yet surging

Inflation not seen up significantly from current level (likely to remain

in 5.0-5.5% range)

Monetary framework to show commitment to low inflation

Jan Dhan plan, Aadhaar to help target subsidies

FY15 price subsidy pegged at 4.24% of GDP

GDP growth points to industrial recovery

GST, direct benefit transfer to be game changers

Recommend retail FDI reform to better farm supply chain

India must adhere to medium term fiscal gap target of 3%

GST, direct benefit transfers to be game changers

Labour, capital, land market distortions limit economic growth

FY15 GDP growth largely driven by domestic demand

Fall in crude prices has compressed import bill

Growth to get boost from likely monetary policy easing

Private investment must be engine of long-term growth

Subsidy doesn't seem best weapon to fight poverty

FISCAL GAP:-

Because of the widening fiscal gap over the years

it’s required that

May have to cut some spending FY15 to meet aim

Need to cut expenditure if revenue not picking up

Falling inflation likely to persist going forward

Budget aim of gross tax revenue growth over estimated

FISCAL HEALTH

Government remains committed to fiscal consolidation(quality key to

make it sustainable)

Need medium to long-term fiscal policy framework

Government borrowings should fund invest, not for current spend

Urge government to aim to bring down fiscal gap to 3.0% of GDP

Higher tax share to states won't impact fiscal discipline

Must start expenditure control process to cut fiscal gap

Divest mop-up so far Rs 240 billion this FY

Coal price reform must factor in impact on power price

Banking hobbled by policy that impedes competition

Potential for further gains from coal pricing reforms

Public invest in railways to be key to growth revival

High rail freight rates hinder industry competitiveness

Private investment must remain primary engine of longrun growth

FINANCIAL SECTOR, MARKETS

Capital, labour, land market distortions hurting manufacturing

SLR need, priority lending creating fincl repression

Trade performance signals good time to scrap gold curbs

Must create extra fiscal space to ensure economic stability

Undertaken major reform steps for banks, insurance

See some stress on asset quality of commercial banks

Rising non-oil, non-gold imports source of concern

Liquidity conditions remained broadly balanced

Low inflation makes space for easing monetary condition

Ensure borrow over the cycle only for capital formation

Steps taken by RBI played key role in liquidity management

Need to conclude monetary policy framework agreement

SUBSIDY

Rationalised subsidies to free resources to some extent

Subsidy on power can only benefit relatively rich

Current study shows rich benefiting more from subsidy

Subsidy reform to rationalise expenditure

Subsidies via direct benefit transfers laudable goal

Rationalisation of food subsidies needs more effort

INVESTMENT

India ranks among most attractive invest destinations

Invest activity seems grounded on stronger footing

Investment stuck in stalled projects at about 7% of GDP

Public invest can revive growth engine in short run

PSUs, especially railways, must lead public investment

Expenditure switch from consumption to invest

FY15 ESTIMATES WERE

weak import largely on sharp fall in crude prices

saw hardly any external support to growth

growth largely domestic demand driven

fiscal deficit of 4.1% of GDP will be met

April-December major subsidies up 12.5% on year

Equity markets continued to do well

price subsidy pegged at 4.24% of GDP

FY16 OUTLOOK (predictions)

8.5% GDP growth possibility

FY16 econ growth seen 8.1-8.5%

Liquidity conditions seen comfortable in FY16

Economy to over perform on inflation, make way for rate cut

Inflation to be 0.5-1.0% lower than RBI's target

FY16 CPI inflation to be in 5.0-5.5% range

A Comparative study between Budget 2014-15

and 2015-16

Budget 2014-15 Budget 2015-16

It was presented on July 10, 2014

by Finance Minister Arun Jaitely

It was presented on February 28,

2015 by Arun Jaitely

Income tax exemption limit was

raised last year by 50,000 to Rs

2.5 lakh and for senior citizens to

Rs 3 lakh

This year total exemption of up to

Rs 4,44,200 can be achieved as

stated by the Finance Minister.

Exemption limit for investment in

financial instruments under 80C

raised to Rs 1.5 lakh from Rs 1

lakh.

Additional 2% surcharge for the

super rich with income of more than

1 crore.

Investment limit in PPF raised to

Rs 1.5 lakh from Rs 1 lakh.

Service Tax increased to 14% from

the current 12.36%. Wealth Tax has

been abolished. 100% exemption

for contribution to Swachch Bharat

apart from CSR.

Deduction limit on interest on

loan for self-occupied house was

raised to Rs 2 lakh from Rs 1.5

lakh.

Rs 2,46,726 crore allocated for

Defence, the primary focus of this

budget is on "Make in India" for

quick manufacturing of Defence

equipment.

Committee to look into all fresh

tax demands for indirect transfer

of assets in wake of retrospective

tax amendments of 2012.

AGRICULTURE

Rs 25, 000 crore for Rural

Infrastructure Development Bank.

To support Micro Irrigation

Programme Rs 5,300 crore are

separately assigned.

Fiscal deficit target was retained

at 4.1% of GDP for current fiscal

and 3.6% in FY 16.

INFRASTRUCTURE :

Rs 70, 000 crores to the

Infrastructure sector. Tax free bonds

for projects in rail road and

irrigation.

Purchasing Power Parity (PPP)

model for infrastructure

development to be revitalised and

govt will bear majority of the risk.

Rs 150 crore was allocated for

increasing safety of women in

large cities.

Rs 150 crore allocated this time for

research and development. NITI to

be established and involvement of

entrepreneurs, researchers to foster

scientific innovations.

Government last year projected

revenue generation from taxes of

Rs 9.77 lakh crore.

WELFARE SCHEMES :

50, 000 toilets will be constructed

under the Swacch Bharat Abhiyan.

Two new programs will be

introduced - GST and JAM Trinity.

GST will be implemented by April

2016

KisanVikaspatra was promised to

be reintroduced, national savings

certificate with insurance cover to

be launched

It has also been projected by the

Finance Minister that the

government will ensure Housing for

all by the year 2020.

FDI limit to be hiked at 49 pc in

defence, insurance.

Up gradation of 80, 000 secondary

and senior secondary schools.

Disinvestment target fixed at Rs

58,425 crore

DBT will be further be expanded

from 1 crore to

10.3 crore.

Gross borrowings were pegged at

Rs 6 lakh crore in 2013-14.

In the Atal Bihari Pension Yojana,

Government will contribute 50% of

the premium limited to Rs 1000 a

year

Contours of GST was finalised

last fiscal; govt assured to look

into DTC proposal.

A new scheme for physical aids and

assisted living devices for people

aged over 80.

Digital India program was

promised to be launched last year

to ensure broadband connectivity

at village level.

RENEWABLE ENERGY

Rs 75 crore for electric cars

production. Renewable energy

target for 2022 : 100K MW in solar;

60K MW in wind; 10K MW in

biomass and 5K MW in small

hydro.

National Rural Internet and

Technology Mission for services

in villages and schools, training in

IT skills proposed.

TOURISM

Development schemes for churches

and convents in old goa; Hampi,

Elephanta caves, Forests of

Rajasthan, Leh Palace, Varanasi,

JallianwalaBagh, QutbShahi tombs

at Hyderabad to be under the new

tourism scheme

Rs 100 crore scheme to support

600 new and existing community

radio stations.

There will also be VISA on arrival

for 150 countries.

Govt's plan expenditure pegged at

Rs 5.75 lakh crore and non plan

at Rs 12.19 lakh crore

Three Key achievements :

1. Financial inclusion- 12.5 crores

families financially mainstreamed in

100 days.

2. Transparent Coal block auctions

to augment resources of the States.

3. Swacch Bharat is not only a

program to improve hygiene but has

also become a movement to

regenerate India

Govt's plan expenditure pegged at

Rs 5.75 lakh crore and non plan

at Rs 12.19 lakh crore

Three Key achievements :

1. Financial inclusion- 12.5 crores

families financially mainstreamed in

100 days.

2. Transparent Coal block auctions

to augment resources of the States.

3. Swacch Bharat is not only a

program to improve hygiene but has

also become a movement to

regenerate India

Set aside Rs 11,200 crore for PSU

banks capitalization, government

in favour of consolidation of PSU

banks ; the objective is to make

banks more accountable and

transparent

It was also described in the budget

report 2015-16 that the credibility of

the Indian economy has been re-

established in the last nine

months.The last nine months have

seen a turn around, making India

one of the fastest growing

economies in the World with a real

GDP growth expected to be around

7.4%

Govt's plan expenditure pegged at

Rs 5.75 lakh crore and non plan

at Rs 12.19 lakh crore

Three Key achievements :

1. Financial inclusion- 12.5 crores

families financially mainstreamed in

100 days.

2. Transparent Coal block auctions

to augment resources of the States.

3. Swacch Bharat is not only a

program to improve hygiene but has

also become a movement to

regenerate India.

Critical evaluation for the budget 2015

Mr Arun Jaitley recently presented the Union Budget for the financial year

2015-2016.Though there was disappointment among the middle class men,

we feel the Budget is more practical vis-à-vis the previous ones.

Though Arun Jaitley says he intends to achieve the fiscal deficit goal this

year, he has prolonged the period by two years to reach the targetted figure of

fiscal deficit of 3% of the GDP. This sends a wrong message in terms of the

government‟s commitment towards fiscal prudence. Also, the revenue deficit

stays at 2.8% of GDP, which is much higher than it should be.

By reducing the corporate profit tax to 25% would definitely lead to

more foreign inflows, as also to do away with exemptions is

appreciable. This would uncluttered the system, especially as a certain

amount of manipulation was needed including hand greasing to avail

exemptions .and also provide a good competitive environment for the

industries leading to better productivity and output.

By charging 2% on the super rich with income above 1 crore would

fetch in more revenues for the Government.100% exemption for

Swachh Bharat and Clean Ganga schemes apart from Corporate Social

Set aside Rs 11,200 crore for PSU

banks capitalization, government

in favour of consolidation of PSU

banks ; the objective is to make

banks more accountable and

transparent

Inflation has declined a structural

shift has been observed, CPI

Inflation projected at 5% by the end

of the year, consequently, easing of

monetary policy.

Rs 7,060 crore were separately

allocated for setting up 100 smart

cities

GDP growth in 2015-16 is projected

to be between 8 to 8.5%.

Responsibility would make the industries more sensitive towards the

society and environment

Though the service taxes have increased from 12.36% to 14%, but it is

to compensate for the coming GST(goods and services tax) bill. GST

would be benefiting both for the Government and the public as only

one tax would be levied covering VAT, service taxes, educational and

higher educational cess, etc instead of several taxes being charged. This

would lead to uniformity and also reduced lay in inter-state goods

transportation.

Providing tax free bonds for railway projects would definitely lead to

increasing investments in the public sector which would be beneficial

for the overall economy, especially at a time when private sector is not

in a mood of loosening its purse strings.

By providing subsidies etc via direct cash transfers would help in

checking black marketing. But the government should make sure that

the subsidies actually reach the pure by bringing in more reforms like a

rule in Mexico where only those families are provided with subsidies

who send their children to schools, etc.

For the Atal Pension Yojana, the government will contribute 50% of

the premium limited to Rs. 1000 a year, New scheme for physical aids

and assisted living devices for people aged over 80,Government to use

Rs. 9,000 crore unclaimed funds in PPF/EPF for Senior Citizens

Fund. So a good news for the old aged people.

But the alloactaion for renewable energy does not seem to be adequate

since solar and wind energy are available in India in abundance

Make in India Policy for defence equipments was definitely the need of

the hour in order to make India a sovereign country in reality and stay

less dependent on countries like Isreal and Russia.

Doing away with different types of foreign investment — like FPI and

FDI — and replace them with a comprehensive type is a good step.

For the common man, a good alternative that the FM has proposed is

the Gold Monetization Scheme and option of buying sovereign gold

bonds with fixed interest rate. The move is also hugely well received

for the fact that India remains a gold obsessed country and these

schemes will remove our need to hold the metal physically while also

encashing on gold which is unproductively lying in lockers.

And though the proposed Bankruptcy Law seems like a small measure,

it will help clean up the system to a very large extent and also put new

people in charge of old but defunct businesses. The move to micro

finance thousands of businesses, to my mind, can be a real cracker as

thousands and lakhs will find employment without big degrees, and this

can be a game-changer.

The other measures to improve ease of doing business like removing

tax uncertainty, introduction of digital invoices and electronic records,

as well as modernising capital markets will go a long way. This is more

so when India has been found to rank a low 142nd position in ease of

doing business in the world index, and when prominent business faces

like Deepak Parekh have recently lamented that things on the ground

haven‟t changed since the new government took office.

There have been a series of feel good proclamations on Black Money

and how evaders will be slapped with Rigorous Imprisonment. But

there is no clarity on how the black sheep will be identified and

booked. Or, how precisely will the direct subsidy policy or Jan dhan

Yojana become effective.

WHAT EXPERTS HAVE TO SAY? To examine the current monetary policy framework of the Reserve Bank of

India (RBI) an expert committee has been appointed and has suggested that

the apex bank should adopt the new CPI (consumer price index) as the

measure of the nominal anchor for policy communication.

The expert committee was headed by Urjit R. Patel, Deputy Governor of the

Reserve Bank of India.

The main recommendations of committee are as follows:-

The the target for inflation or nominal anchor should be set at 4 per

cent with a band of +/- 2 per cent around it.

Shifting the monetary policy regime of the current approach to one that

is centred around the nominal anchor new CPI only.

From the current level of 10 per cent Inflation to be brought down to 8

per cent not exceeding over a period to the next 12 months and to 6 per

cent over a period not exceeding the next 24 month period before

formally adopting the recommended target of 4 per cent inflation with a

band of +/- 2 per cent.

Ensuring that the fiscal deficit as a ratio to Gross Domestic Product is

brought down to 3.0 per cent by 2016-17, the committee asked the

same from the Central Government. The government has set a fiscal

deficit target of 4.8% for the current fiscal year.

IMPLICATION :

This may be because it could mean higher interest rates for longer—not

the kind of thing a government seeking to spur growth in a slowing

economy wants to head.

“The key implication of this new CPI-based inflation targeting

framework is that interest rates in India will remain higher for longer”

NOW WHAT WE HAVE TO SAY?

RECOMMENDATION

Source:- DIFFERENT NEWSPAPER EDITIONS OF ECONOMIC TIMES

After having seen the past performance of India it was required that the

country required

1. Enhanced revenue generation to be government priority

2. Hyper-growth in tech start-ups, service sector

3. To balance higher public invest with fiscal discipline

4. Rural penetration of IT services to drive 'Make in India'

After the release of the budget and our analysis of the The hike in excise duty

on diesel and petrol, reduced subsidies and expenditure compression will help

the government to stick to the challenging fiscal deficit target of 3.9 per cent

of GDP despite weakness in revenue collection and delayed divestment.

Jaitley maintains his commitment to bring the deficit down to 3% of GDP,

but in three rather than two years.The Union Budget has introduced several

measures to stimulate investments but it fails in terms of fiscal consolidation.

Of course there are few things have done in terms of tax measures, including

service tax increase and 2% surcharge on the super rich, this would garner

some money. But while the Commission has advocated more tax to states at

42% instead of earlier 32%, the flow of resources from the Centre to the state

through other channels has been cut.

Unless there is a dramatic fall in inflation, it‟s hard to believe that India‟s

policy rate will go down below. Higher fiscal deficit will lead to higher

government borrowing. That will put pressure on interest rates and private

firms will be denied money when they need it.

A thumbs up should be given to the Modi Government's recent move to

introduce a flexible inflation-targeting framework. It will help deliver low

and stable inflation, and diminish the prospect of renewed bouts of high

inflation.

Also Discussions on the creation of a debt management agency independent

of RBI have been on for years because of the obvious conflict of interest that

the central bank has by being a debt manager and a money manager. As the

government‟s investment banker, RBI‟s objective is to keep the borrowing

cost of the government low and to achieve this it can use a string of

instruments including open market operations while as a monetary authority

its objective is price stability, typically achieved through change in interest

rates. Despite the conflict of interests, RBI has been entrusted with this job

because of India‟s high fiscal deficit and consequently large market

borrowings. The draft code of the Financial Sector Legislative Reforms

Commission (FSLRC) has proposed the creation of an independent public

debt management agency—it would have an independent goal and objective

but would operate as an agent of the central government. To make it a

success, it should be a statutory corporation, keeping an arm‟s length both

from the government as well as RBI.

BIBLIOGRAPHY Throughout the paper we have used software package Eviews and Microsoft

Excel to run regression models.

Data collection

Secondary data which are collected from the Handook of statistics

reports of RBI have been utilized in this study.

Further, textbooks, journals, magazines in the economic perspective

were utilized for this study.

Following are the online links that have been referred :

http://zeenews.india.com/business/budget-2015/economic-survey-

2015-overview-and-highlights_119732.html

http://www.livemint.com/Opinion/kHm7c3DoPy3UooEA6mpSQJ/RBI-will-not-be-in-a-

hurry-to-cut-rates.html?utm_source=copy

https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web

&cd=3&cad=rja&uact=8&ved=0CCcQFjAC&url=http%3A%2F%2

Fwww.academia.edu%2F1381060%2FFiscal_Deficit_and_Inflation

_An_empirical_analysis_for_India&ei=XsAZVd2PCIK2uASd3oLQ

Dg&usg=AFQjCNFJSJ9wUDcm8W9_UZzAmQmPdqabcA&sig2=

ylM0NA5uv69fa8UN7hSv2g&bvm=bv.89381419,d.c2E

https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web

&cd=12&cad=rja&uact=8&ved=0CCUQFjABOAo&url=https%3A

%2F%2Fideas.repec.org%2Fa%2Frej%2Fjournl%2Fv14y2011i42p1

31-

158.html&ei=e8AZVd7XIMOjugSbmoCoBQ&usg=AFQjCNESVn

S--ngxRDq0TsCw-27NJ2hAiQ&sig2=6ozwWozyRJVD-

fvRVSgeuw&bvm=bv.89381419,d.c2E

https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web

&cd=13&cad=rja&uact=8&ved=0CC0QFjACOAo&url=http%3A%

2F%2Fwww.imf.org%2Fexternal%2Fpubs%2Fft%2Fwp%2F2003%

2Fwp0365.pdf&ei=e8AZVd7XIMOjugSbmoCoBQ&usg=AFQjCN

FkJsM369orfcG02l72fHUYNAs7rw&sig2=s8cZx7Jfo-

opRHkNU7tOGw&bvm=bv.89381419,d.c2E

APPENDIX:

TABLE 1

YEAR Fiscal D. Taxes

1975-76 13.64 60.1

1976-77 15.72 65.81

1977-78 18.13 70.6

1978-79 21.26 85.68

1979-80 31.33 85.67

1980-81 51.1 93.58

1981-82 45.91 115.42

1982-83 59.73 130.17

1983-84 77.7 154.41

1984-85 109.72 176.51

1985-86 135.44 211.4

1986-87 170.36 243.19

1987-88 184.31 280.15

1988-89 207.7 337.51

1989-90 237.22 383.49

1990-91 306.92 429.78

1991-92 246.22 500.69

1992-93 302.32 540.44

1993-94 459.94 534.49

1994-95 403.13 674.54

1995-96 424.32 819.39

1996-97 463.94 937.01

1997-98 630.62 956.72

1998-99 799.44 1046.52

1999-00 899.1 1282.71

2000-01 1078.54 1366.58

2001-02 1230.74 1335.32

2002-03 1338.29 1585.44

2003-04 1155.58 1869.82

2004-05 1262.52 2247.98

2005-06 1457.43 2702.64

2006-07 1512.45 3511.82

2007-08 1207.14 4395.47

2008-09 3290.24 4433.19

2009-10 4114.48 4565.36

2010-11 3610.26 5698.68

2011-12 5141.03 6297.65

2012-13 4844.5 7418.77

2013-14 5160.42 8360.26

Source:rbi.org.in

TABLE 2

YEAR Fiscal D. Govtexp

1975-76 13.64 683.14

1976-77 15.72 710.24

1977-78 18.13 817.88

1978-79 21.26 889.5

1979-80 31.33 965.9

1980-81 51.1 1180.68

1981-82 45.91 1356.76

1982-83 59.73 1497.73

1983-84 77.7 1753.57

1984-85 109.72 1940.37

1985-86 135.44 2141.54

1986-87 170.36 2402.09

1987-88 184.31 2666.49

1988-89 207.7 3104.97

1989-90 237.22 3468.07

1990-91 306.92 3985.29

1991-92 246.22 4577.35

1992-93 302.32 5161.18

1993-94 459.94 5913.08

1994-95 403.13 6871.54

1995-96 424.32 7920.15

1996-97 463.94 9286.29

1997-98 630.62 10185.59

1998-99 799.44 11663

1999-00 899.1 13125.37

2000-01 1078.54 14066.61

2001-02 1230.74 15316.72

2002-03 1338.29 16202.93

2003-04 1155.58 17713.05

2004-05 1262.52 19175.08

2005-06 1457.43 21527.02

2006-07 1512.45 24766.67

2007-08 1207.14 28407.27

2008-09 3290.24 32492.84

2009-10 4114.48 37075.66

2010-11 3610.26 43603.23

2011-12 5141.03 51418.97

2012-13 4844.5 57720.6

2013-14 5160.42 64850.37

Source:rbi.org.in

TABLE 3

Source: www.rbi.org, World Bank

Year Fd G.E Tax Revenue P.D CPI

1980-81 51.1 1180.68 93.58 47.94 395

1981-82 45.91 1356.76 115.42 48.92 444

1982-83 59.73 1497.73 130.17 53.29 467

1983-84 77.7 1753.57 154.41 52.55 520

1984-85 109.72 1940.37 176.51 55.95 521

1985-86 135.44 2141.54 211.4 60.51 546

1986-87 170.36 2402.09 243.19 64.85 572

1987-88 184.31 2666.49 280.15 68.15 629

1988-89 207.7 3104.97 337.51 67.7 708

1989-90 237.22 3468.07 383.49 70.06 746

1990-91 306.92 3985.29 429.78 68.85 803

1991-92 246.22 4577.35 500.69 72.89 958

1992-93 302.32 5161.18 540.44 72.01 1076

1993-94 459.94 5913.08 534.49 72.39 1114

1994-95 403.13 6871.54 674.54 70.04 1247

1995-96 424.32 7920.15 819.39 67.28 1381

1996-97 463.94 9286.29 937.01 64.37 256

1997-98 630.62 10185.59 956.72 66.29 264

1998-99 799.44 11663 1046.52 67.11 293

1999-00 899.1 13125.37 1282.71 70.47 306

2000-01 1078.54 14066.61 1366.58 73.67 305

2001-02 1230.74 15316.72 1335.32 78.79 309

2002-03 1338.29 16202.93 1585.44 82.86 319

2003-04 1155.58 17713.05 1869.82 83.23 331

2004-05 1262.52 19175.08 2247.98 82.13 340

2005-06 1457.43 21527.02 2702.64 79.07 353

2006-07 1512.45 24766.67 3511.82 74.66 380

2007-08 1207.14 28407.27 4395.47 71.44 409

2008-09 3290.24 32492.84 4433.19 72.21 450

2009-10 4114.48 37075.66 4565.36 70.63 513

2010-11 3610.26 43603.23 5698.68 65.53 564

2011-12 5141.03 51418.97 6297.65 65.52 611

2012-13 4844.5 57720.6 7418.77 66.03 672

REGRESSION

REGRESSION R1

Source :Eviews

REGRESSION R2

Linear Regression

Dependent Variable: Fiscal Deficit Method: Least Squares Sample(adjusted): 1975 2013 Included observations: 39 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

C -134.8355 70.02981 -1.925401 0.0619 Government Expenditures

0.087454 0.003212 27.22402 0.0000

R-squared 0.952451 Mean dependent var 1095.355 Adjusted R-squared 0.951166 S.D. dependent var 1511.907 S.E. of regression 334.1073 Akaike info criterion 14.51072 Sum squared resid 4130224. Schwarz criterion 14.59603 Log likelihood -280.9591 F-statistic 741.1472 Durbin-Watson stat 1.564470 Prob(F-statistic) 0.000000

SOURCE: EVIEWS

REGRESSION R3

SOURCE: EVIEWS

REGRESSION R4

NOTE: PD- public debt and FD- fiscal deficit

Dependent Variable: FD Method: Least Squares Date: 03/15/15 Time: 08:14 Sample(adjusted): 1981 2012 Included observations: 30 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

C 9.130019 2.137554 4.271247 0.0004 PD -0.073234 0.040118 -1.825466 0.0829

R-squared 0.142820 Mean dependent var 5.248636 Adjusted R-squared 0.099961 S.D. dependent var 1.085762 S.E. of regression 1.030066 Akaike info criterion 2.983632 Sum squared resid 21.22074 Schwarz criterion 3.082817 Log likelihood -30.81995 F-statistic 3.332324 Durbin-Watson stat 1.396195 Prob(F-statistic) 0.082902

Linear Regression:

Dependent Variable: Fiscal Deficit Method: Least Squares Sample(adjusted): 1975 2013 Included observations: 39 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

C -15.18406 84.50565 -0.179681 0.8584 TAXES 0.656178 0.030547 21.48108 0.0000

R-squared 0.925768 Mean dependent var 1095.355 Adjusted R-squared 0.923762 S.D. dependent var 1511.907 S.E. of regression 417.4571 Akaike info criterion 14.95616 Sum squared resid 6448006. Schwarz criterion 15.04147 Log likelihood -289.6451 F-statistic 461.4366 Durbin-Watson stat 1.570070 Prob(F-statistic) 0.000000

Source: Eviews

REGRESSION R5

SOURCE:-EVIEWS

REGRESSION R6

Dependent Variable: FD

Method: Least Squares

Sample(adjusted): 1975- 2013

Included observations: 39 after adjusting endpoints

Variable Coefficient

Std. Error t-Statistic Prob.

CPI 0.080328 0.872121 0.092107 0.9271

C 1051.747 533.2325 1.972399 0.0561

R-squared 0.000229 Mean dependent var (shown in graph above)

1095.355

Adjusted R-squared -0.026792

S.D. dependent var (shown in graph above)

1511.907

S.E. of regression 1532.026 Akaike info criterion 17.55649

Sum squared resid 86842852

Schwarz criterion 17.64180

Log likelihood -340.3516

F-statistic 0.008484

Durbin-Watson stat 0.093813 Prob(F-statistic) 0.927110

Dependent Variable: CPI

Method: Least Squares

Sample(adjusted): 1975 -2013

Included observations: 39 after adjusting endpoints

Variable Coefficient

Std. Error t-Statistic Prob.

FD 0.002854 0.030983 0.092107 0.9271

C 539.7459 57.35648 9.410375 0.0000

R-squared 0.000229 Mean dependent var 542.8718

Adjusted R-squared -0.026792

S.D. dependent var 284.9691

S.E. of regression 288.7612 Akaike info criterion 14.21900

Sum squared resid 3085173. Schwarz criterion 14.30431

Log likelihood -275.2705

F-statistic 0.008484

Durbin-Watson stat 0.450843 Prob(F-statistic) 0.927110

SOURCE: EVIEWS

Dependent Variable: FD Method: Least Squares Sample: 1980 2012 Included observations: 33

Variable Coefficient Std. Error t-Statistic Prob.

CPI 0.280124 0.185327 1.511507 0.1419 GE 0.191776 0.029766 6.442810 0.0000 PD -16.70020 6.522082 -2.560562 0.0161 TR -0.738632 0.221396 -3.336243 0.0024 C 607.1922 433.3843 1.401048 0.1722

R-squared 0.960787 Mean dependent var 1135.101 Adjusted R-squared 0.955185 S.D. dependent var 1419.770 S.E. of regression 300.5597 Akaike info criterion 14.38790 Sum squared resid 2529412. Schwarz criterion 14.61464 Log likelihood -232.4003 F-statistic 171.5108 Durbin-Watson stat 1.548943 Prob(F-statistic) 0.000000