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Importance of Government Deficit in India.

Importance of Government deficit in India

When the government exercises fiscal policy, it incurs deficit (shortfall in funds). The expenditure of the government is usually higher than the revenue collection. The importance of government deficit in India prefers to run in deficit because deficit enables it to undertake more welfare of the people.

There are various important of government deficit in India from different perspectives, which enhance analysis of the nature and cause of deficit.

Revenue Deficit 

Revenue deficit is the difference between revenue expenditure and revenue receipts.

Revenue expenditure – Revenue receipts = Revenue deficit

Revenue deficit indicates that the government’s revenue expenditure exceeds the government’s revenue receipts. On the other hand, revenue surplus indicates that the importance of government’s revenue receipts exceed the government’s revenue expenditure. Revenue deficit for the year ending on 31 March 2016 was 2.5% of GDP and on 31 March 2017 was 2.1% of GDP.

Difference between Capital and Revenue Items of
Expenditure and Income

Before we explain the difference between capital and revenue items of expenditure and income, we must know that transactions can be divided into two types according to the period of time.

  1. Long-term period: Long-term period means the time period of more than 1 year. Transactions having long-term implications are capital transactions. For instance, a building purchased by the importance of government deficit will be used over many years. Thus, the transaction to purchase the building is a long-term transaction.
  2. Short-term period: Short-term period means less than or equal to 1 year. Transactions having short-term implications are revenue transactions. For instance, salary paid by the importance of government deficit to its employees is only for rendering services in the current year. Therefore, the implications of paying salary are limited to the present financial year.

Thus, on the basis of time period, transactions can be classified into two types: revenue and capital. Further, both revenue and capital transactions can be in nature of receipts or expenditure.

Capital expenditures

These expenditures have implications of more than 1 year. Examples include buildings purchased by the importance of government.

Revenue expenditures

Expenditures having implications of less than or equal to 1 year are called revenue expenditure. The benefit that the government gets is for short period of time. Examples include salary paid by the government, etc.

Capital Receipts

These receipts have implications of more than 1 year. Examples include loans from the public. If the government takes loan, it is required to repay the loan along with interest.

Revenue Receipts

These receipts have implications of less than or equal to 1 year. Examples are tax collected by the government. The government is not liable for anything in the future for the tax collected in the current year.


Fiscal Deficit

Fiscal deficit refers to the excess of total expenditure over total receipts (excluding borrowings) during a given financial year.

 Fiscal deficit = Total expenditure – Total receipts, excluding borrowings

Fiscal deficit includes not just revenue expenditure and receipts but also capital expenditure and receipts, except borrowings. Fiscal deficit for the year ending on 31 March 2017 was 3.5% of GDP (3.9% for the year ending 31 March 2016).

The extent of fiscal deficit is an indication of how far the government is spending beyond its means. In other words, fiscal deficit indicates the level of borrowings of the government.

Primary Deficit

Primary deficit is one of the parts of fiscal deficit. While fiscal deficit is the difference between total revenue and expenditure, primary deficit can be arrived by deducting interest payment from fiscal deficit. Interest payment is the payment that  importance of government makes on its borrowings.

     Primary deficit = Fiscal deficit – Interest payments

Interest payments are excluded from the calculation of primary deficit because interest payments are made on account of borrowings made in the past. Thus, primary deficit specifies the net impact of present transactions (and excludes the impact of transactions undertaken in the past).

Note: Like there are fiscal, revenue, and primary deficits of the central government, in the same manner each state has separate figures for fiscal, revenue, and primary deficits.

Effective Revenue Deficit

Earlier, the central government used to classify the grants given to state governments as revenue expenditure. However, some part of the central government grants is used by state governments for the purpose of capital expenditure (such as purchase of various assets). Thus, in the budget of 2012-13, the Ministry of Finance has coined the term effective revenue deficit.

Effective revenue deficit = Revenue deficit – Central grants used by States for capital transactions

For example, under the MGNREGA programme, some capital assets such as roads, ponds, etc. are created. Thus, the grants for such expenditure will not strictly fall in the revenue expenditure.

Government deficit Financing in India 

Deficit refers to the difference between expenditure and receipts. In public finance, deficit financing is the practice in which a importance of  government deficit of India spends more money than it receives as revenue, and the difference is made up by borrowing or printing new funds.

Deficit financing is a necessary evil in a welfare state as it allows the state to undertake activities that, otherwise, would be beyond its financial capacity.

Consequences of government Deficit of India Financing

  • Inflation: Deficit financing may lead to inflation. Due to deficit financing, money supply increases without increase in aggregate supply.
  • Adverse effect on savings: It is not possible for the people to maintain the previous level of savings during period of rising prices.
  • Rise in inequality: Price rise creates inequality in income distribution, which makes the rich richer and the poor poorer. The fixed wage earners are badly affected, and their standard of living deteriorates.
  • Balance of payment problems: A high price level as compared to other countries makes the exports more expensive in the global market and imports cheaper in the domestic economy.

Should government Deficit Financing in India be Resorted to?

A certain measure of deficit financing is inevitable to step up the tempo of economic progress beyond what it would have been in the absence of deficit financing. As long as deficit financing does not lead to inflation, there is no objection to its use.


The FRBM Act 2003 was adopted to institutionalize the fiscal discipline at both the central and state levels. Originally, the FRBM Bill had given annual numerical targets as well. But in the process of making it a law, the annual targets were dissolved and the act simply said that the centre would take appropriate measures to eliminate revenue deficit by 31 March 2008. The act left the annual numerical targets, to be formulated by the central government in the form of FRBM rules.

The key provisions of the act as well as FRBM rules are as follows:

  • Every year, the government will bring down the revenue deficit by 0.5% and eliminate it by 2007-08.
  • Every year, the government will bring down the fiscal deficit by 0.3% and bring it down to 3% by 2007-08.
  • Total liabilities of the union government should not rise by more than 9% a year.
  • The union government would not give guarantee to loans raised by PSUs and state governments for more than 0.5% of the GDP in aggregate.
  • State governments were asked to formulate their own FRBM acts. Those states that have formulated their own FRBM acts have been given autonomy to borrow further without the permission of the central government. Other states can undertake further borrowing only with the permission of Central Government.

Impact of Global Financial Crisis on FRBM Act, 2003

Due to the 2008 global financial crisis, the deadlines for the implementation of the targets in the act were initially postponed and subsequently suspended in 2009. At times of global financial crisis, the central government incurred heavy expenditure and reduced tax collection in order to insulate Indian economy from global economic slowdown.

After overcoming the 2008 global financial crisis, the FBRM Act was readopted in 2012-13 but not in a strict sense.

Criticism of the FRBM Act

  • Importance of government deficit in India to enforce compliance were the particularly weakest area of the act. It required the Finance Minister of India to conduct quarterly reviews of the receipts and expenditures of the government and place these reports before the Parliament. Deviations to targets set by the central government for fiscal policy had to be approved by the Parliament. No other measures for the failure of compliance have been specified.
  • Some criticized the act and its rules as it might require the importance of government deficit in India to cut back on the social expenditure necessary for the uplift of the poor population of India.

Indian Economy

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