5 important concepts of budgetary deficit is as follows

2/10/2014 5 Important Concepts of Budgetary Deficit is as Follows

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5 Important Concepts of BudgetaryDeficit is as Follows

by Smriti Chand Economics

Budgetary deficit is a multi-dimensional concept. It is quite easy to say

that a budgetary deficit is simply the excess of public expenditure over

public revenue. However, in practice, the concept admits of many

variations, and yields widely divergent measures of budgetary deficit.

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The existence of such a large number of measures is explained by the

fact that each measure has analytical and policy relevance, and there is

no single measure which may be universally preferred over all others for

all time to come.

The choice of the correct measure would depend upon the purpose of

analysis. A brief description of the various concepts of budgetary deficit

is as follows.

1. Revenue Deficit:

The excess of expenditure on revenue account over receipts on revenue

account measures revenue deficit.

Receipts on revenue account include both tax and non-tax revenue and

also grants. Tax revenue is net of States share as al so net of assignment



of Union Terri Tory taxes to local bodies. The non-tax re venue includes

interest receipts, dividends and profits, and non-tax receipts of Union

Territorys Grants include grants from abroad also.

Expenditure on revenue account includes both Plan and Non-Plan

components. Thus, the Plan component includes Central Plan and

Central Assistance for States and Union Territory Plans.

Non- Plan expenditure includes interest payments, defence expenditure

on revenue account, subsidies, debt-relief to farmers, postal services,

police, pensions, other general services, social services, economic

services, non-plan revenue grants to States and Union Territories,

expenditure of Union Territories with legislature, and grants to foreign

governments.

Revenue deficit means dissavings on government account and the use of

the savings of other sectors of the economy to finance a part of the

consumption expenditure of the government.

An important objective of fiscal policy should be to ensure surplus in

the revenue budget so that the government also contributes to raising

the rate of saving in the economy.

In 2008-09, revenue deficit of the central government is at Rs. 2, 41,273

crore (Revised estimates) as compared to Rs. 52,569 crore in the

previous year. In percentage terms, the revenue deficit is 4.5 per cent

(RE) of the gross domestic product in 2008-09, registering an increase

of 3.4 per cent from the previous year.

2. Capital Deficit:

The excess of capital disbursements over capital receipts measures the



capital deficit.

Capital Deficit = Expenditure on Capital Account Capital Receipts

Plan capital disbursements include those on Central Plan and Assistance

for States and Union Territories. Non-Plan Capital disbursements

include defence expenditure on Capital account, other non-plan capital

outlay, loans to public enterprises, States and Union Territory

Governments, foreign governments and others; and non-plan capital

expenditure of Union Territories without legislature. The items of

capital receipts include recoveries of loans extended by the centre itself,

but only net receipts of loans raised by it.

It may be noted that receipts on account of sale of 91 days treasury bills

and drawing down of cash balances do not form a part of capital

receipts. However, net receipts on account of sale of 182 days and 364

days treasury bills and sales proceeds of government assets are included

in capital receipts.

3. Fiscal Deficit:

Fiscal deficit is the difference between revenue receipts plus certain

non-debt capital receipts and the total expenditure including loans net

of repayments.

Fiscal Deficit = Total Expenditure (Revenue Receipts + Non-debt

Capital Receipts)

In short, fiscal deficit indicates the total borrowing requirements of the

government from all sources. This may also be called Gross Fiscal

Deficit (GFD). It measures that portion of government expenditure

which is financed by borrowing and drawing down of cash balances.



It should be noted that in India, borrowings are net amounts (that is,

gross borrowings less repayments). Similarly, loans extended by

Government of India are included on the expenditure side of capital

account while recoveries are included on the receipts side. Therefore,

the amount of loans and advances by Government of India is also

reduced.

It is often stated that fiscal deficit measures an addition to the liabilities

of Government of India. In 2008 -09, fiscal deficit was at a figure of Rs.

3, 26,515 crore (RE) which is 6.1 per cent of Gross Domestic Product.

Fiscal deficit was of the order of 4 per cent of gross domestic product

(GDP) at the beginning of 1980s, and was estimated at more than 8 per

cent in 1990-91. The growing fiscal deficit had to be met by borrowing

which led to a mammoth internal debt of the government.

The servicing of this debt has become a serious problem. Public debt in

India is mostly subscribed to by commercial banks and financial

institutions. A judicious macro-management of the economy requires a

progressive reduction in the fiscal deficit and revenue deficit of the

government.

4. Primary Deficit:

It is simply fiscal deficit minus interest payments. In the 2008-09

budget, primary deficit was shown at a figure of Rs. 1, 33,821 crore

(Revised estimates).

This measure is also referred to as Gross Primary Deficit (GPD).

Measures of deficit described above (except capital deficit) include

payments and receipts of interest. These transactions, however, reflect a

consequence of past actions of the government, namely, loans taken and



given in years prior to the one under consideration.

Exclusion of interest transactions would, therefore, enable us to see the

way the government is currently conducting its financial affairs.

Accordingly, Primary deficit is defined as Fiscal Deficit less net interest

payments, (that is less interest payments plus interest receipts).

Net primary deficit is obtained by subtracting Loans and Advances

from net fiscal deficit. It is also equal to Fiscal Deficit less interest

payments plus interest receipts less loans and advances.

The primary deficit which was 4.3 per cent of GDP during 1990-91 came

down to 1.5 per cent of GDP during 1997-98 and in the revised estimates

for the year 2008-09 it was 2.5 per cent of GDP.

5. Monetised Deficit:

Besides ways and means advances, the Reserve Bank of India also

supports the governments borrowing programme. Monetised deficit

indicates the level of support extended by the Reserve Bank of India to

the governments borrowing programme.

Monetised deficit is defined as net increase in net Reserve Bank of India

credit to central government. The rationale for this measure of deficit

flows from the inflationary impact which a budgetary deficit exerts on

the economy.

Since borrowings from Reserve Bank of India directly add to money

supply, this measure is termed monetised deficit. It is obvious that

monetised deficit is only a part of fiscal deficit.



Related articles:

1. Short Essay on Fiscal Deficit

2. What are the Different Kinds of Budget?

3. Short Essay on Deficit Spending in India

4. Get Complete Information About Revenue Budget

5. Get Complete Information on Twelfth Finance Commission of India

6. What are the Tolerable Limits of Deficit Spending?

7. Balance of Payments (BoP) Consists of Two Accounts Current

Account and Capital Account

8. What are the Main Economic Classifications of Capital

Expenditures?

9. What are the Important Functional Classifications of Capital

Expenditures?

10. Some Important Recommendations Made by Chakravarty

Committee

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