Fiscal Crisis of 1991

Dr. Yogita Beri

Assistant Professor,

Department of Economics,

Vasanta College for Women,

Rajghat Fort (B.H.U),

Varanasi- 221001.

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What is Fiscal Crisis ?�

• The fiscal imbalance takes place when the government expenditure exceeds government revenue. This fiscal imbalance is also referred as the fiscal crisis.
• In 1980, the growing burden of non-development expenditure caused deterioration in the fiscal situation of India. Later this resulted in a fiscal crisis at the beginning of 1991-1992.

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Indicators of Fiscal Crisis �

The main indicators of fiscal crisis are various deficits such as :

• Revenue Deficit (RD) : It is the difference between revenue receipts (income) and revenue expenditure.
• Budgetary Deficit (BD) : It is the difference between total expenditure and total receipts. Here, both revenue and capital expenditure and receipts are considered.
• Fiscal Deficit (FD) : It is the excess of total expenditure over revenue receipts and grants. In other words, fiscal deficit is the budget deficit plus government borrowings and other liabilities.
• Primary Deficit (PD) : It is the fiscal deficit minus interest payments.

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From the above table, it is clear that fiscal deficit is about 6.6%of GDP in 1990-91. Overall the revenue deficit has declined from 3.3% in 1990-91 to 2.7% of GDP in 2005-06.�

Causes of Fiscal Crisis �

The main factors responsible for the fiscal crisis in India are as follows :

• External payment crisis
• Decrease in foreign exchange reserve
• Withdrawal of NRI deposits
• Outflow of foreign currency
• Breakdown in credit Availability
• BOP crisis
• Decreased in purchasing power.
• Political instability
• Gulf crisis

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• Increase in Subsidies
• Payment of Interest
• Defence Expenditure
• Poor Performance of Public Sector
• Excessive Government borrowings
• Tax Evasion
• Weak Revenue Mobilisation
• Huge Borrowings
• Other Causes

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�Consequences of Fiscal Crisis �

The fiscal imbalance has resulted in harmful consequences like mounting inflation, deficit in balance of payment, etc. It has also adversely affected the growth of economy. The government must introduce major fiscal correction policies to overcome the fiscal crisis.

The consequences of fiscal crisis i.e. a sustained high fiscal deficits over 20 years are as follows :-

1. Debt Trap

2. Cut in Capital Expenditure

3. No Increase in Expenditure on Education and Health

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4. High Interest Rates

5. Slow Economic Growth

6. Other Consequences

Some other consequences of fiscal crisis are :-

• Fiscal imbalance may also lead to inflation in the economy.
• High fiscal deficit may discourage foreign investment in the country.
• The government has to borrow additional funds to solve fiscal deficit, which put extra burden on the government for payment of interest. It further worsens the fiscal imbalance.
• Poor prospects of growth
• Lower credit rating
• Fiscal deterioration

�Conclusion On Fiscal Crisis �

The fiscal imbalance however still continue as the Government has failed to reduce its own expenditure. The extravagant expenditure done by politicians and minister continues without any restriction. The populist policy followed by the Government, failure to reduce fertilizer subsidy, and massive burden of interest payment has still not take out the Indian economy from a situation of severe fiscal imbalances.

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