Have you ever thought of how the government makes ends meet? If this was a Hindi film from the 1970s, and the family found itself in a tight situation, you know what Nirupa Roy would do. She would take the kangan that was the family heirloom and beg Pran, the moneylender, to save her family from destruction. Pran would be super mean to her, and looking from a corner would be a young boy who seethes in rage quietly and grits his teeth and the next frame cuts to Nirupa Roy crying and the next frame cuts to even more seething young boy and there’s music and the next frame is Amitabh Bachchan in bell bottoms doing some more seething. But the point is that’s how Ms Roy bridged the deficit. How does the government do the same? Moneycontrol will tell you how and we won’t even be mean or anything.
MARKET LOANS
The government raises loans from the market by bonds. The RBI auctions these bonds on the government’s behalf. And financial institutions and banks mostly buy these bonds. Simple enough? Next.
TREASURY BILLS
No no, this has nothing to do with Buffalo Bill or Bill Clinton or the Rhinoceros Hornbill. Have you seen that thing? That’s a crazy looking bird man. But treasury bills are not. For temporary cash flow, the government issues short term treasury bills or bonds. These binds have a maturity of 364/ 182/ 91 days.
SMALL SAVINGS
The government, let’s call her Nirupa Roy for this installment, also borrow money from individuals through saving schemes. Post Office Savings, National Savings Certificates, Public Provident Funds etc are some examples of such small savings. These are pooled under the National Small Savings Fund or the NSSF. And it could also be temporarily used for bridging the deficit.
And lastly, let’s address the term that we hear so often and know so little about. Fiscal Deficit. First I thought that was Physical Deficit, and immediately I thought of my friend Rakesh. He has a lot of physical deficit. While I on the other hand have a lot of physical surplus. And then someone told me it was Fiscal. And even that applied to my friend Rakesh. What I mean to see is that Rakesh is very thin and very poor and has great physical as well as fiscal deficit. Considering I have neither physical nor fiscal deficit, Rakesh ends up borrowing money from me all the time. So now in this story, I guess I am Pran…?, and Rakesh is Nirupa Roy? How did that happen? It’s a weird image, but let’s roll with it – the fiscal deficit is a measure of how much Nirupa Rakesh Government borrows annually. The government has set a fiscal deficit target of 3.2% of the GDP for the year 2017-18 and 3% for the next fiscal year. So if Rakesh comes asking for more than 3.2% of his annual income, all I gotta say is – It ain’t gonna happen bro.
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