What is even more striking is how the Central Government has chosen to finance these deficits so far. The entire deficit has effectively been financed by market borrowings, which as a result are way in excess of the planned total for the whole of the financial year already. As Chart 8 shows, the extent of market borrowings only in the first eight months of the financial year, at more than Rs. 67,000 crore was much above the projected total for the entire year. Clearly, this is one target that will definitely overshoot, unlike the targets for much needed plan and capital expenditure !

Chart 8 >> Click to Enlarge
 
And this particular overshooting, which results on excessive dependence upon market borrowings alone to finance the deficit, in turn has an effect on future government deficits. The current year's experience provides more than enough indication of this. The Budget estimates have already projected interest payments of the central Government to amount to Rs. 88,000 crore over the entire year, that is 31 per cent of total expenditure or 37 per cent of revenue expenditure, which is an extremely high proportion. As the current year's fiscal deficit continues to be financed by market borrowings, it puts further pressure on future interest payments and adds to the unproductive part of government expenditure substantially.
 
We thus have a situation of extreme fiscal mismanagement, in which the inability to generate tax revenues has been accompanied by a curbing of government expenditure in necessary areas, and nevertheless the larger than anticipated fiscal deficit is being financed by expensive market borrowings which will inevitably put great pressure on the public fisc in future.
 
The real question, however, is not how high the deficits will be, but whether the amount of the deficits is all that should concern us. The current obsession only with the extent of the fiscal deficit, which characterises not only the Finance Ministry but also much of the financial press, completely misses the point of why government deficits are seen to be significant or problematic in the first place. For this reason, it also fails to realise that there are conditions under which more government expenditure or larger deficits can actually be positive for economic activity, growth and material living standards, and that these conditions are likely to be met at present. In the accompanying article, we consider this issue in more detail.

Fiscal deficits and economic activity
When faced with domestic economic recession, the standard response of governments for much of the postwar period was to increase expenditure and allow for a more expansionary fiscal stance. The Keynesian reasoning behind such an approach is straightforward enough : when there is unutilised capacity and unemployment in an economy, any increased expenditure creates additional demand in excess of the initial expenditure through multiplier effects, and thereby increases economic activity. This not only reduces or transforms a recession into growth, but also in turn contributes to increased tax revenues, so that the eventual deficit need not be as large as the initial expenditure.