2/10/2014

5 Important Concepts of Budgetary Deficit is as Follows

5 Important Concepts of Budgetary Deficit is as Follows

by Smriti Chand Economics

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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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5 Important Concepts of Budgetary Deficit is as Follows

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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
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5 Important Concepts of Budgetary Deficit is as Follows

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
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5 Important Concepts of Budgetary Deficit is as Follows

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.
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5 Important Concepts of Budgetary Deficit is as Follows

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
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5 Important Concepts of Budgetary Deficit is as Follows

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.

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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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