"The fiscal deficit" is a guaranteed conversation killer. What is fiscal deficit?

What is fiscal deficit?
Fiscal deficit is essentially the difference between what the government spends and what it earns. It is expressed as a percentage of GDP.

Fiscal deficit is an economic phenomenon, where the Government's total expenditure surpasses the revenue generated . It is the difference between the government's total receipts (excluding borrowing) and total expenditure. Fiscal deficit gives the signal to the government about the total borrowing requirements from all sources. 

Components of fiscal deficit

The primary component of fiscal deficit includes revenue deficit and capital expenditure.

Revenue deficit: It is an economic phenomenon, where the net amount received fails to meet the predicted net amount to be received.

Capital expenditure: It is the fund used by an establishment to produce physical assets like property, equipments or industrial buildings. Capital expenditure is made by the establishment to consistently maintain the operational activities.

In India, the fiscal deficit is financed by obtaining funds from Reserve Bank of India, called deficit financing. The fiscal deficit is also financed by obtaining funds from the money market (primarily from banks). 

Arguments: Fiscal deficit lead to inflation

According to the view of renowned economist John Maynard Keynes, fiscal deficits facilitates nations to escape from economic recession. From another point of view, it is believed that government need to avoid deficits to maintain a balanced budget policy.

In order to relate high fiscal deficit to inflation, some economists believe that the portion of fiscal deficit, which is financed by obtaining funds from the Reserve Bank of India, directs to rise in the money stock and a higher money stock eventually heads towards inflation.

Expert recommendation

Financial advisors recommend that the Government should not promote disinvestment to reduce fiscal deficits. Fiscal deficit can be reduced by bringing up revenues or by lowering expenditure.

Impact

Fiscal deficit reduction has an impact over the agricultural sector and social sector. Government's investments in these sectors will be reduced. 

Source-

Economy Watch

Rediff Business

What is Reverse Globalization. ?

Globalization, whether considered beneficial or harmful, is often considered the major driving force of the modern global economy. From clothing to computers, most of the products we use have components from many countries and are produced far from where they are sold. This system of utilizing multiple sources for components is due in part to the low cost of transportation. However, will this always be the case?

In an article by ABC News , the consequences of higher transportation costs are described. In the summer of 2008, the cost of a barrel oil surpassed $100 for the first time in history. These massive oil costs led to an even larger increase in shipping costs. Due to these increased shipping costs, some companies found that it was more profitable to produce goods in the country in which they were selling in rather than using lower manufacturing costs somewhere else. This change is described as reverse globalization.

Although oil prices are not as high as they once were, reverse globalization is still occurring. The automotive industry provides an example of this. In the United States, Korean car company Hyundai built their first plant in 2002 to reduce their overall costs. Since transportation costs are proportional to the volume of goods being transported, Hyundai chose to manufacture their top selling U.S. vehicles at this plant to minimize these costs. Despite being only a single plant, this decision has been very successful in that it has helped Hyundai garner a stronger presence in the United States.

This might lead one to think that countries like India will suffer from this reverse globalization in America. However, similar occurrences are happening in India as well. Most high-end automakers who could afford to have their vehicles shipped into India since they already command a price premium are now being built in India for Indians. These include vehicles like the Audi A4, BMW 5 Series, and Mercedes C-Class.

Coca-Cola, which used to be imported into India, is now being produced in plants once used by a local cola producer.

Given the gains experienced world-wide from reverse globalization, does this mean the end of globalization? Or is this simply a false term, and merely an evolution of globalization?

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From The Times

June 11, 2008

Oil price crisis threatens to reverse globalisation

sales journal

A sales journal is a specialized accounting journal used in an accounting system to keep track of the sales of items that customers have purchased by changing them to their accounts-receivable account.

Definition

trading account

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Definition

That part of an income statement which shows how thegross (operating) profit was generated through the firm'strading activities.

revenue account

Definition

US term for the account showing the inflow of money fromsale of goods or services and the costs and expenseschargeable against it, over an accounting period. Theequivalent UK term is profit and loss account.

profit and loss account

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Definition

Alternative term for revenue account.

balance sheet

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Definition
A quantitative summary of a company's financial condition at a specific point in time, including assets,liabilities and net worth. The first part of a balance sheet shows all the productive assets a company owns, and the second part shows all the financing methods (such as liabilities and shareholders' equity). also calledstatement of condition.

Liquidity Adjustment Facility

LAF

What Does Liquidity Adjustment Facility Mean?
A tool used in monetary policy that allows banks to borrow money through repurchase agreements. This arrangement allows banks to respond to liquidity pressures and is used by governments to assure basic stability in the financial markets.

Investopedia explains Liquidity Adjustment Facility
Liquidity adjustment facilities are used to aid banks in resolving any short-term cash shortages during periods of economic instability or from any other form of stress caused by forces beyond their control. Various banks will use eligible securities as collateral through a repo agreement and will use the funds to alleviate their short-term requirements, thus remaining stable.