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 which neither create liabilities or 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 which creates 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 loan 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).|
Fiscal deficit is made from two terms ‘fiscal’ and ‘deficit’. Let us start by looking at these two terms.
- Fiscal means yearly. That is the data collected is of 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 that it generates, excluding money from borrowings.
Fiscal deficit = Total expenditure – Total receipts excluding borrowings
Fiscal deficit = Total Expenditure – Revenue receipts – Capital receipts excluding borrowing
If we add borrowing in total receipts, fiscal deficit is zero. Clearly, fiscal deficit gives borrowing requirements of the government.
Revenue deficit is excess of 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 revenue deficit.
Revenue deficit signifies that government’s own earning is insufficient to meet normal functioning of government departments and provision of services. Revenue deficit results in borrowing. Simply put, when government spends more than what it collects by way of revenue, it incurs revenue deficit.
Revenue deficit = Total Revenue expenditure – Total Revenue receipts
Primary deficit is defined as fiscal deficit of current year minus interest payments on previous borrowings. In other words whereas fiscal deficit indicates borrowing requirement inclusive of interest payment, primary deficit indicates borrowing requirement exclusive of interest payment (i.e., amount of loan).
We have seen that borrowing requirement of the government includes not only accumulated debt, but also interest payment on debt. If we deduct ‘interest payment on debt’ from borrowing, the balance is called primary deficit.
It shows how much government borrowing is going to meet expenses other than Interest payments. Thus, zero primary deficits means that government has to resort to borrowing only to make interest payments.
Primary deficit = Fiscal deficit – Interest payments
EXAMPLE showing Calculation of Revenue Deficit, Fiscal Deficit & Primary Deficit
(value In Crores) and the figures are assumed
- Revenue Receipts (Tax & Non-Tax Revenue) =₹3,00,000
- Capital Receipts =₹1,60, 000
- Loan recoveries + other receipts =₹10,000
- Borrowings & Other liabilities =₹1,50,000
- Total Receipts (1 +2) = ₹4,60,000
- Revenue Expenditure (Subsidies, employee salaries/pension, education/health services, grants, welfare) =₹3,50,000
- Interest Payments = ₹120,000
- Other Expenditures = ₹2,30,000
- Capital Expenditure (Loans given to state, capital expenditure on defence, power projects) =₹1,10,000
- 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.
HOW IS FISCAL DEFICIT FINANCED?
There are several ways by which the government can tackle fiscal deficit. They are:
- Borrowing from domestic sources: Fiscal deficit can be met by borrowing from domestic sources, e.g., public and commercial banks. It also includes tapping of money deposits in provident fund and small saving schemes. Borrowing through issuing Govt bonds are also done time to time to time.
- Borrowing from external sources: For instance, borrowing from World Bank, IMF and Foreign Banks
- Deficit financing (printing of new currency notes): Another measure to meet fiscal deficit is by borrowing from Reserve Bank of India. Government issues treasury bills which RBI buys in return for cash from the government. This cash is created by RBI by printing new currency notes against government securities. Thus, it is an easy way to raise funds but it carries with it adverse effects also. Its implication is that money supply increases in the economy creating inflationary trends. Therefore, deficit financing, if at all it is unavoidable, should be kept within safe limits.
- Through fiscal policies:
- Increase in taxes: Increase in taxes would lead to increase in revenue, which in turn would reduce the deficit. But increase in taxes is not very popular among the people. One of the big reason for not reducing Petrol prices by Govt is to keep Fiscal deficit in check.
- Reducing government spending: Government can also cover its deficit by reducing the government spending. That can be done by reducing the subsidies or reducing the expenditure on infrastructure etc.
Is fiscal deficit advantageous? It depends upon its use. Fiscal deficit is advantageous to an economy if it creates new capital assets which increase productive capacity and generate future income stream. On the contrary, it is detrimental for the economy if it is used just to cover revenue deficit.
INDIA FISCAL DEFICIT
Fiscal deficit of India is calculated as a percentage of GDP. The government has decided to manage Fiscal deficit at 3.2% of GDP in 2017-18.
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.
Fiscal deficit reflects the borrowing requirements of the government for financing the expenditure inclusive of interest payments. As against it, primary deficit shows the borrowing requirements of the government including interest payment for meeting expenditure. Thus, if primary deficit is zero, then fiscal deficit is equal to interest payment. Then it is not adding to the existing loan.
Thus, primary deficit is a narrower concept and a part of fiscal deficit because the latter also includes interest payment. It is generally used as a basic measure of fiscal irresponsibility. The difference between fiscal deficit and primary deficit reflects the amount of interest payments on public debt incurred in the past. Thus, a lower or zero primary deficits means that while its interest commitments on earlier loans have forced the government to borrow, it has realised the need to tighten its belt.