Deficit Reduction - How to Reduce Budgetary Deficit?

We know that

Deficit=

Expenditure

Less

Receipts

Hence, Deficit can be Reduced by either

Reducing Expenditure

or

Increasing Receipts

Deficit Reduction by Reducing Expenditure

Making Govt schemes more efficient

Govt gives number of subsidy like food subsidy (free ration to poor people)

In this case, there is lot of corruption and very less subsidy actually reach the common man

So in this case, govt can launch bank transfer directly to poor person's account instead of giving subsidy

This will save money of govt and help in meeting revenue deficit

Reducing Govt Programs in Vital Areas

Govt spending in vital areas like health, education ,agriculture is very important

Cutting back expenses in these areas will have adverse effect on economy in long run

Deficit Reduction by Increasing Receipts

Govt can Increase Taxes to Meet Deficit

There are 2 types of taxes-Direct and Indirect

It is better to increase direct taxes (like income tax) because it is progressive in nature (more tax on rich,less or no tax on poor)

If indirect taxes like GST are increased, they are regressive in nature (affect both rich and poor equally)

Govt can Make Disinvestment

Govt can sell its shares in Public sector undertaking to receive money which can be used to meet Budgetary deficit

NCERT Questions

Question 14

Discuss the issue of deficit reduction.

Other Books

Question 1

In the following questions, select the correct answers:

Which of the following can reduce the budgetary deficit?

1. Reducing expenditure
2. Increasing Receipts
3. Taking Loans
4. Both A and B

Oswaal Questions

Question 1

Read the report given below and answer the questions that follow:

NEW DELHI: Finance Minister Nirmala Sitharaman on Monday announced plans to sell stake in LIC as part of her disinvestment plans for F/Y 22.

In her Budget speech, the FM said her government will complete divestment of BPCL, CONCOR and SCI in F/Y 22.

She said that her government will privatise two public sector banks (PSBs) and one general insurance company as well.

"LIC IPO may see light of day soon," said Jiger Saiya, Partner and Leader - Tax & Regulatory Services at BDO India.

Earlier, in an interview with ET, LIC Chairman M R Kumar had said the IPO is very much likely.

"The point is that it is going to be big and we want to get the valuations right," he had said adding that the listing of an insurance company requires determining the embedded value of the business.

LIC has started the process and would soon announce the software, which will assist it determine the right valuation.

We have floated an RFP for the actuarial firm that will undertake the exercise.

This calculation will take some time.

Once this process is done, we will be ready," Kumar said on January 11.

Last week, a Reuters report quoting sources suggested that the government was looking to sell 10-15 per cent in the country's biggest insurer to improve public finances.

To facilitate the sale of the LIC stake, the government will need Parliament approval to amend the LIC Act.

As part of its divestment drive, four CPSEs " HAL, SAIL, Bharat Dynamics and IRCTC "have come out with offers for sale (OFSs) this financial year.

They garnered Rs12,907 crore to the exchequer.

In addition, IPOs of IRFC and Mazagon Dock Shipbuilders together fetched Rs1,984 crore.

Also, this year, the government sold shares worth about %601,837 crore in private companies, in which it holds stakes through SUUTI.

Four state-owned companies, NTPC, RITES, NMDC and KIOCL, completed share buybacks, adding %602,769 crore to the exchequer.

The government is also looking to sell its entire 26.12 per cent stake in Tata Communications (TCL), erstwhile VSNL, through an OFS and strategic sale this financial year.

The process of privatisation of Air India, BPCL, Pawan Hans, BEML, Shipping Corp, Neelachal Ispat Nigam Limited and Ferro Scrap Nigam Limited (FSNL) is currently under way.

"Budget: LIC IPO coming; 2 PSU banks, 1 insurer to be sold" - The Economic Times - February 02, 2021.

Question 1

The government will privatise _________ Public Sector Banks.

1. One
2. Two
3. Three
4. None of the above

Question 2

What is the main reason for this disinvestment?

1. To reduce the fiscal deficit
2. To revive the economy
3. To create monopoly of industrialists
4. To earn revenue

Question 3

According to Reuters, why is the government looking to sell country's insurer?

1. To reduce revenue deficit
2. To reduce fiscal deficit
3. To improve public finances
4. To get money from other than taxes.

Question 4

What other thing can the government do to improve the deficit with respect to the current Covid situation?

1. Borrowing from public
2. Lowering government expenditure
3. Raising government revenue
4. None of the above