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The economic situation relates to the current condition of a country or region’s economy. These circumstances evolve according to the economic and business cycles, as an economy experiences periods of boom and decline. When an economy is growing, the economic circumstances are seen as sound or positive; when an economy is declining, these conditions are considered unfavourable or negative.
Prevailing Economic Situations
Economic indicators can generally be classified as leading, coincident, or trailing. Leading indicators are often significant for economists to forecast economic circumstances for the following three to six months. Indicators such as new orders for manufactured products and new house permits, for example, show the rate of future economic activity concerning the rate of manufacturing production and home development.
Other indicators that help predict future economic circumstances include:
- The consumer confidence index.
- New factory orders (goods ordered by retail and other sectors).
- Corporate inventories (the inventories maintained by businesses to keep up with demand).
The main contribution to GDP is consumer demand, and its growth was already slowing before the pandemic. Any additional deterioration will aggravate the demand situation.
Similarly, investment demand growth rates fell into the negative zone before the COVID-19 pandemic impacted the economy. The economy was working at less than full capacity before the pandemic, and an investment downturn was widely anticipated.
Government consumption spending increased consistently, but it could not compensate for the drop in the preceding two components.
If all other present global economic environment elements stay substantially constant, net exports as a demand driver will be unable to boost GDP in the short run.
There may be an improvement in those external circumstances, but the immediate prudent course is to avoid putting too much faith in a miracle resurgence of strong export growth.
What do you understand by fiscal Deficit?
A fiscal deficit presents the difference between the money collected through taxes by the government and the money it will or has to spend on new schemes or any other problem. There is a formula to calculate this.
The formulas for determining the budget deficit are as follows:
- Total spending minus total receipts equals fiscal deficit (excluding borrowings).
- (Revenue expenditure + Capital expenditure) – (Revenue revenues + Capital receipts excluding borrowings) Equals fiscal shortfall
- (Revenue expenditure – Revenue collections) + (Fiscal deficit) (Capital expenditure – Capital receipts excluding borrowings).
- Capital expenditure – Capital receipts excluding borrowings
- Borrowings = fiscal deficit.
What exactly is a revenue deficit?
A revenue deficit results when the realised net income is less than expected. If a company or government has a revenue shortfall, its income is insufficient to pay for its core operations. Revenue deficit is the amount calculated through the difference between the government expenditure and revenue receipt.
Revenue receipts are further divided into two categories: tax and nontax. This is the government’s money to fulfil the public’s needs or for welfare. If the revenue deficit increases, it is due to increased expenditure or the lack of revenue receipts. This is not a good sign for the country. It will directly affect that country’s economy, eventually leading to either selling the PSUs or borrowing money from the other countries.
The Drawbacks of a Revenue Deficit
A revenue imbalance, if not addressed, can have an adverse impact on a government’s or business’s credit rating. This is because a government that continually runs a deficit may suggest that it cannot satisfy its present and future recurrent commitments. Moreover, the government or businesses would have to cut back on investments or borrow to make up for the shortfall.
Conclusion
India is a developing country; hence, it is essential for India to maintain its economy. However, due to COVID-19, India has had a hard hit in its economy. The dense population of India damaged the economic system of India. Revenue expenditure is the money spent by the government on things that will not be an asset to the country but are just a liability. The government needs to ensure a stable economy of the country.
