Before we understand about Fiscal deficit, we should know about various types of revenues & expenditure of Indian government –
|Revenue Receipts||The earnings made by the government neither create liabilities nor reduce assets of the government. For example, receipts from tax collections, interest on investments, dividend earnings, and earnings from services provided.|
|Capital Receipts||The earnings made by the government create liabilities (borrowing from the public in form of PPF and small saving deposits, National Pension Scheme, etc. ) or reduce assets (divesting stake in a particular company, called disinvestment, or recovering loans made to state governments.)|
|Revenue expenditure||It is the expenditure made by the government on a recurring basis such as administrative expenses, interest payments on loans taken by the government, pensions, subsidies etc.|
|Capital expenditure||It is a productive, asset-creating (or liability-reducing) long-period, non-recurring expenditure of the government. For example; expenditure on creating the infrastructure (roads, electricity dams etc.), loans made to state governments and repayment of loans by the central government (reducing liability).|
What is the meaning of Fiscal Deficit?
- Fiscal means yearly. The data collected is 1 year and hence not cumulated with the previous years.
- Deficit’ is the amount by which a resource falls short of a mark, most often used to describe a difference between cash inflows and outflows.
A fiscal deficit occurs when a government’s total expenditures exceed the total revenue, excluding money from borrowings.
The formula for the fiscal deficit is as follows:
Fiscal deficit = Total expenditure – Total receipts excluding borrowings
Fiscal deficit formula = Total Expenditure – Revenue receipts – Capital receipts excluding borrowing
If we add borrowing in total receipts, the budgetary deficit is zero. Fiscal deficit gives borrowing requirements of the government.
Don’t get stumbled with questions like,” how to calculate revenue deficit” or “define revenue deficit”. We are here to solve all your queries.
Revenue deficit over total revenue expenditure of the government over its total revenue receipts. It is related to only revenue expenditure and revenue receipts of the government. Alternatively, the shortfall of total revenue receipts compared to total revenue expenditure is defined as a revenue deficit. Revenue deficit signifies that the government’s earnings are insufficient to meet the normal functioning of government departments and provision of services—revenue deficit results in borrowing. Put, when the government spends more than what it collects through revenue, it incurs a revenue deficit.
Revenue deficit = Total Revenue expenditure – Total Revenue receipts
It is very important to know the major difference between fiscal and revenue deficits in today’s time. For that matter, let us compare both as fiscal deficit vs revenue deficit.
Revenue deficit refers to the difference between revenue expenditure and revenue receipts, where revenue receipts—the current income of the government—are less than revenue expenditure. All figures on income and expenditure in the government budget are included here. Conversely, the fiscal deficit is a measurement that shows government borrowings to the public. The higher the fiscal deficit, the more will be the government repayments.
So, what is the primary deficit definition, or when simply put, what is primary deficit actually? What if the formula of primary deficit?
A primary deficit is equal to a fiscal deficit minus interest payments on previous borrowings. In other words, a budgetary deficit indicates a borrowing requirement inclusive of interest payment, and a primary deficit means a borrowing requirement exclusive of interest payment (i.e., amount of loan). We have seen that the government’s borrowing requirement includes accumulated debt and interest payment on the debt. If we deduct ‘interest payment on debt’ from borrowing, the balance is a primary deficit. It shows how much government borrowing will meet expenses other than interest payments. Thus, zero primary deficits or implications of primary deficit when zero mean that the government has to borrow only to make interest payments.
The primary deficit formula is as follows:
Primary deficit = Fiscal deficit – Interest payments.
Now, with this simple explanation, we believe that it would be easier for you if someone asks you to define primary deficit.
EXAMPLE showing Calculation of Revenue Deficit, Fiscal Deficit & Primary Deficit
(value In Crores) and the figures are assumed
1. Revenue Receipts (Tax & Non-Tax Revenue) =₹3,00,000
2. Capital Receipts =₹1,60, 000
1. Loan recoveries + other receipts =₹10,000
2. Borrowings & Other liabilities =₹1,50,000
3. Total Receipts (1 +2) = ₹4,60,000
4. Revenue Expenditure (Subsidies, employee salaries/pension, education/health services, grants, welfare) =₹3,50,000
1. Interest Payments = ₹120,000
2. Other Expenditures = ₹2,30,000
5. Capital Expenditure (Loans given to state, capital expenditure on defense, power projects) =₹1,10,000
6. Total Expenditure (4+5) =₹4,60,000
Fiscal Deficit [1+2(a) – 6 =2 (b)]= 1,50,000 – This figure shows the borrowing govt need to meet budget shortfall
Revenue Deficit [1-4]= ₹50,000 – This shows the shortfall on revenue budget of the govt, which need to be met by either borrowing or increasing capital revenue
Primary Deficit [Fiscal Deficit – 4(a)] = ₹30,000 – This figure shows the actual total budget shortfall if we don’t consider interest payments on previous loans.
There are several ways by which the government can tackle the fiscal deficit. They are
The fiscal deficit can be met by borrowing from domestic sources, e.g., public and commercial banks. It also includes tapping money deposits in provident funds and small saving schemes. Borrowing through issuing Govt bonds is also done from time to time.
For instance, borrowing from World Bank, IMF, and Foreign Banks
Another measure to meet fiscal deficit is borrowing from the Reserve Bank of India. Government issues treasury bills which RBI buys in return for cash from the government. RBI creates this cash by printing new currency notes against government securities. Thus, it is an easy way to raise funds, but it also carries adverse effects. It implies that the money supply increases, creating inflationary trends. Therefore, if at all it is unavoidable, deficit financing should be kept within safe limits.
Through fiscal policies:
- Increase in taxes: An increase in taxes would lead to a rise in revenue, which would reduce the deficit. But an increase in taxes is not very popular among the people. One of the big reasons for not reducing Petrol prices by Govt is keeping the fiscal deficit in check.
- Reducing government spending: Government can also cover its deficit by reducing government spending. That can be done by reducing the subsidies or the expenditure on infrastructure etc.
Is fiscal deficit advantageous? It depends upon its use. A fiscal deficit is beneficial to an economy if it creates new capital assets which increase productive capacity and generate a future income stream. On the contrary, it is detrimental for the economy if used just to cover the revenue deficit.
The net fiscal deficit of India is calculated as a percentage of GDP. The government has decided to manage the Fiscal deficit at 3.2% of GDP in 2017-18. The Finance Minister had projected the fiscal deficit target at 3.3 per cent of GDP for the financial year 2018-19. In the last 5 years, the fiscal deficit of India has reduced. It means the government has cut government expenditure or the revenue has increased. The fiscal deficit reflects the government’s borrowing requirements for financing the expenditure, including interest payments. As against it, the primary obligation shows the government’s borrowing requirements, including interest payment for meeting costs. Thus, if the primary deficit is zero, the fiscal deficit equals interest payment. Then it is not added to the existing loan.
Thus, the primary deficit is a narrower concept and a part of the fiscal deficit because the latter also includes interest payments. It is generally used as a direct measure of fiscal irresponsibility. The difference between fiscal deficit and primary deficits reflects the number of interest payments on public debt incurred in the past. Thus, a lower or zero primary deficit means that while interest commitments on earlier loans have forced the government to borrow, it has realized the need to tighten its belt.