FISCAL POLICY & BUDGET BASICS

• Fiscal policy refers to policy concerning the use of state treasury or Govt finances to
achieve macroeconomic goals.

• It is the government programme of making discretionary changes in the pattern & level
of its expenditure, taxation & borrowings in order to achieve economic growth,
employment opportunities, income equality & stabilization of the economy.

What is the Budget?

• Annual Financial Statement of the Govt

• A statement of estimated receipts and expenditure of the govt.

• Govt. has to tell people how much it taxed, borrowed and spent- and on what- every
year

• It also has to get permission from Parliament to tax or spend

The govt. has 3 accounts:

1. Consolidated Fund

2. Contingency Fund

3. Public Account

Consolidated Fund consists of:

1. All revenues received by the govt.

2. Loans raised by it

3. Its receipts from recoveries of loans granted by it

 All expenditure of the govt is incurred from the consolidated fund.

 No amount can be withdrawn from the fund without authorisation from the Parliament

Contingency Fund

 Fund placed at the disposal of the President

 Enables the govt to meet urgent unforseen expenditure pending authorisation from the
Parliament
  Corpus of the fund authorised by the Parliament at present is Rs 500 crores

Public Account

• Certain transactions that enter govt accounts in respect of which govt acts more as a
banker

• Transactions related to provident funds, small savings collection which have to be paid
back to the people

• Also includes revenues of Government set apart for expenditure on specific objects like
road development, primary education, Reserve/Special Funds (cess for education,
Swacch Bharat, Agriculture etc)

• Public Account funds that do not belong to the Government and have to be finally paid
back to the persons and authorities who deposited them, do not require Parliamentary
authorization.

• When amounts are withdrawn from the Consolidated Fund and kept in the Public
Account for expenditure on specific objects, the actual expenditure on the specific
object is again submitted for vote of the Parliament for withdrawal from the Public
Account.

The Budget comprises:

 The Revenue Budget

 The Capital Budget

Revenue Budget

The Revenue Budget consists of the revenue receipts of the Government (Tax revenues and
other Non Tax revenues) and the expenditure met from these revenues.

Tax revenues comprise proceeds of taxes and other duties levied by the Union.

Other non-tax receipts of the Government mainly consist of interest and dividend on
investments made by the Government, fees and other receipts for services rendered by the
Government.
Revenue expenditure is for the normal running of Government departments and for rendering
of various services, salaries and wages, making interest payments on debt, meeting subsidies,
grants in aid, etc.

Broadly, the expenditure which does not result in creation of assets for the Government of
India, is treated as revenue expenditure.

All grants given to the State Governments/Union Territories and other parties are also treated
as revenue expenditure even though some of the grants may be used for creation of capital
assets.

Capital Budget

Capital receipts and capital payments together constitute the Capital Budget.

The capital receipts are loans raised by the Government from the public (these are termed as
market loans), borrowings by the Government from the Reserve Bank of India and other parties
through the sale of Treasury Bills, the loans received from foreign Governments and bodies,
disinvestment receipts and recoveries of loans from State and Union Territory Governments
and other parties.

Capital payments consist of capital expenditure on acquisition of assets like land, buildings,
machinery, equipment, as also investments in shares, etc., and loans and advances granted by
the Central Government to the State and the Union Territory Governments, Government
companies, Corporations and other parties.

Revenue Deficit

• REVENUE EXPENDITURE - REVENUE RECEIPTS

• Gap between Revenue Receipts & Revenue Exp.

• Ideally revenue expenditure or the money required for the normal running of the govt
at least should be covered by revenue receipts. This implies that revenue deficit should
be 0.

• Government borrowing for capital expenditure still makes sense since it creates
productive capacity.

• But the Indian economy runs a revenue deficit. This means that govt borrows even for
its normal running.
 • Effective Revenue Deficit = Revenue deficit - Grants given to state govts for creation of
capital assets

Fiscal Deficit

• Fiscal Deficit is the excess of total expenditure (Revenue + Capital) over revenue receipts
and only non-debt capital receipts

• Fiscal Deficit = Total Expenditure (Revenue & Capital) – (Revenue Receipts & Non-debt
Capital Receipts)

• Non-debt capital receipts: Recoveries of loans and other receipts such as disinvestment
proceeds etc.

• Primary Deficit = Fiscal deficit –Interest payment

Adverse Impact of A High Fiscal Deficit & It’s Link with Monetary Policy

• High fiscal deficit leads to increase in government debt and its burden (interest
payments)

• It leads to inflation. High fiscal deficit implies high govt expenditure as well as
borrowing- greater money supply-inflation.

• Higher fiscal deficit and the inflation that it brings about prevents the reduction of
interest rates. Leads to tight monetary policy. Hence central banks look towards the
govt for fiscal deficit curtailment before easing interest rates.

• High fiscal deficit leads to crowding-out (reduction) of private investment- as a result of

high interest rates and lesser resources available for private sector to borrow.

• Large deficits adversely affect economic growth- A large revenue deficit is financed by
borrowed funds, large amounts go towards interest payments, thus smaller amount is
left with the govt for productive investment, infrastructure and social capital (education
& health)

• Consistently high fiscal deficits may lead the government into a debt trap as more and
more borrowings are needed by the government to service its debt.
Essential Readings/References
https://www.indiabudget.gov.in/doc/Key_to_Budget_Document_2020.pdf
https://www.indiabudget.gov.in/doc/Budget_at_Glance/bag1.pdf
https://www.indiabudget.gov.in/doc/bh1.pdf
https://www.livemint.com/budget/news/story-of-budget-20-in-9-charts-11580578583869.html
https://www.livemint.com/news/india/india-s-fiscal-performance-in-nine-charts-11581857139177.html
https://www.livemint.com/budget/opinion/let-data-on-fiscal-multipliers-guide-budget-allocations-
11580142375800.html
https://www.livemint.com/market/mark-to-market/markets-pin-hopes-on-budget-but-big-bang-
stimulus-is-in-doubt-11580061492378.html
https://www.livemint.com/news/india/structural-reforms-fiscal-measures-have-to-be-continued-
shaktikanta-das-11579875128145.html
https://www.livemint.com/news/india/an-sos-from-bharat-s-poorest-citizens-11580656521613.html
https://www.livemint.com/news/india/govt-sets-ball-rolling-to-sell-part-of-stake-in-lic-
11580664861264.html
https://www.livemint.com/money/personal-finance/what-does-partial-divestment-in-lic-mean-for-its-
policyholders-11580664343791.html
https://www.livemint.com/market/mark-to-market/the-lic-share-sale-is-a-valuer-s-nightmare-and-a-
banker-s-dream-11581876851830.html
https://www.livemint.com/market/mark-to-market/india-inc-left-yearning-for-missing-consumers-after-
union-budget-11580669609629.html
https://www.livemint.com/money/personal-finance/more-confusion-less-clarity-for-taxpayers-
11580666487116.html
https://www.livemint.com/money/personal-finance/how-much-tax-do-you-pay-on-your-investment-
11580667045616.html
https://www.livemint.com/budget/news/what-the-budget-says-and-how-it-impacts-you-
11580581766028.html
https://www.livemint.com/opinion/online-views/it-is-complicated-but-also-taxpayer-friendly-
11580662519183.html
https://www.livemint.com/budget/news/centre-woos-foreign-portfolio-investors-to-help-revive-
growth-11580669619549.html
https://economictimes.indiatimes.com/wealth/tax/dividend-income-becomes-taxable-in-receivers-
hands-ddt-abolished/articleshow/73836773.cms?from=mdr
https://www.livemint.com/budget/news/relief-from-ddt-if-you-are-in-lower-tax-slab-
11580585915434.html
https://www.livemint.com/industry/banking/small-banks-may-get-a-trust-vote-with-hike-in-deposit-
insurance-11580670277996.html