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CONCEPT OF DEFICITS IN BUDGET EXPLAINED

CONCEPT OF DEFICITS IN BUDGET EXPLAINED

  • A budget can be a balance budget, surplus budget or a deficit budget on revenue account.
  • The Union Budget every year projects four deficits viz., revenue deficit, fiscal deficit, primary deficit and effective revenue deficit. It may also project monetised deficit which reflects borrowing from the RBI.
  • Various deficits that appear in Union Budget are defined as follows: Revenue Deficit – Revenue Expenditure – Revenue Receipts
  • This deficit implies what the government spends on a day to day basis (i.e. on revenue account) and what the government earns on a day-to-day basis.                CONCEPT OF DEFICITS IN BUDGET EXPLAINED
  • The day-to-day expenditure of the government on revenue account invariably has been in excess of its day-to-day receipts causing a serious problem of high revenue deficit year after year.
  • This deficit is in effect deficit on account of fast rising non-plan and consumption expenditure of the government for which government resorts to market borrowing which results in high fiscal deficit. The key to reduce fiscal deficit is to reduce revenue deficit first.

Effective Revenue Deficit:

This concept was introduced in the Union Budget 2012-13. Effective Revenue Deficit = Revenue Deficit – Grants given to States for creation of capital assets. These grants are shown in the revenue expenditure of the government.

Fiscal Deficit = Total Expenditure – Revenue Receipts + non-financial liability or non-debt imposing capital receipts (grants, recoveries of past loans, proceeds of sales of assets, divestment proceeds)

  • The concept of fiscal deficit assumes great significance as it indicates the level of overall borrowings of the government.
  • The target for fiscal deficit for 2014-15 placed at 4.1 percent of GDP but alarmingly, fiscal deficit shot up to 99 percent of its full year target between April and November, 2014 due to lower tax revenues, higher tax refunds and collections from other sources lower than expected.
  • The Finance Ministry, in its mid­year economic analysis conceded that the fiscal deficit target of 4.1 percent was over ambitious.                          CONCEPT OF DEFICITS IN BUDGET EXPLAINED

Primary Deficit = Fiscal Deficit- Interest Payments

  • Primary deficit shows what government’s fiscal deficit would have been if there was no burden of interest payments on past loans.
  • A low primary deficit means that most of the fiscal deficit is on account of interest payments.
  • If this deficit is negative, it means that the entire fiscal deficit is on account of interest payments on past loans.

Monetised Deficit = Net increase in the RBI credit to the government which is financed by printing fresh currency.

This implies deficit which may be plugged by borrowing from the RBI and not from banks. In this case, RBI prints fresh currency to finance borrowings of the government.

  • There are three ways in which a high fiscal deficit can be plugged and financed viz, borrowing from RBI, borrowing from Commercial Banks and borrowing from external sources.
  • Each of these three modes of financing has its own problems for the economy. For example, if the deficit is financed from the RBI, it may lead to excess money supply in the economy which is a potential source of inflation.                                        CONCEPT OF DEFICITS IN BUDGET EXPLAINED

ALSO READ : https://www.brainyias.com/adjusted-gross-revenue/

Indian Economy

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