INTRODUCTION

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.
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.

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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.
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3. 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.

4. 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.
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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.

5. 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.

These entire budgetary deficits reveal fiscal imbalance. Fiscal imbalance & budget deficit
result in harmful consequences like mounting inflation, deficit in balance of payment, etc. It
also adversely affects the growth of the economy. The government must introduce fiscal
correction policies to overcome the deficit budget and fiscal crisis.

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FISCAL DEFICIT

Fiscal deficit is an economic phenomenon, where the Government's total expenditure

surpasses the revenue generated. It is the difference between the government's total receipts
(excluding borrowing) and total expenditure. Fiscal deficit gives the signal to the government
about the total borrowing requirements from all sources.
According to the view of renowned economist John Maynard Keynes, a fiscal deficit
facilitates nations to escape from economic recession. From another point of view, it is
believed that government need to avoid deficits to maintain a balanced budget policy.
Fiscal deficit is the difference between the governments expenditures and its revenues
(excluding the money its borrowed). A countrys fiscal deficit is usually communicated as a
percentage of its gross domestic product (GDP).
Fiscal Deficit = Total Expenditure (Revenue Receipts + Non-debt Capital Receipts)

In other words, fiscal deficit is equal to budgetary deficit plus governments market
borrowings and liabilities.

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
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percent 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.

Considering that the Indian economy is growing between 5 to 5.5 percent in the financial year
ended March 2013, fiscal deficit is definitely a challenge to the economy. According to the
World Bank, growth in India is projected to rise to 6.5 percent and 6.7 percent in FY2014 and
FY2015, respectively. Indias fiscal deficit has been the centre of debate for many occasions
this year. And in April, Finance Minister, P Chidambaram has brought it down from 4.9
percent last year to 4.8 percent of the GDP in 2013-14.
COMPONENTS OF FISCAL DEFICIT:
The primary component of fiscal deficit includes revenue deficit and capital expenditure.

Revenue deficit: It is an economic phenomenon, where the net amount received fails
to meet the predicted net amount to be received.

Capital expenditure: It is the fund used by an establishment to produce physical

assets like property, equipments or industrial buildings. Capital expenditure is made
by the establishment to consistently maintain the operational activities.

In India, the fiscal deficit is financed by obtaining funds from Reserve Bank of India, called
deficit financing. The fiscal deficit is also financed by obtaining funds from the money
market (primarily from banks).

CAUSES OF FISCAL DEFICIT

Government spending, inflation and lower revenue are among some of the main factors that
point to fiscal deficit. The cynical nature of fiscal deficit does not only jeopardize the growth
of the country but also the governments economic management abilities.
In an ideal financial system, which has a balanced fiscal deficit, the cost of expenditure is low
while production and growth is advancing. But when there is an increase in fiscal deficit it
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means that the government is spending too much while it is earning less. Hence, it is
important that the government keeps its expenses under control.
One way the government earns money, is through taxes. For example, if the government
lowered taxes or provided tax concessions to a particular group of people, then it would earn
less, leading to an increase in fiscal deficit. And thats one of the reasons why you will find
the government giving a face-lift to the tax structures. In the same context, cutting of custom
duty and excise duty will lead to declining revenues.
Like India, many developing countries are making an effort to resolve big fiscal deficits. On
the bright side, for India, among other sources of revenue, foreign investments and inflow of
remittances from Indians living overseas has helped avoid very high deficits.
Fiscal deficit does not come about only in case of creating less revenue and spending more
money. Another major reason for a growing fiscal deficit can be slow economic growth or
sluggish economic activities.

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REASONS FOR HIGH FISCAL DEFICIT:

While the government fights to manage money, here are a few reasons why India has a
soaring fiscal deficit. It is high because in the corporate sector, bailouts are becoming
common and subsidies are being high. The money that the government earns through non-tax
revenue is not big and the money it earns from taxes is not enough.

INDIAS FISCAL DEFICIT AND ITS CURRENT AFFAIRS

According to government data, Indias fiscal deficit during 2012-13 financial years was 4.9
percent of the nations gross domestic product. While China aims to keep its fiscal deficit
below 3 percent this year, lets take a look at how fiscal deficit is making news in India.
Curbing import on gold is one of the measures taken by the government to correct the
countrys fiscal deficit. But with a weakening rupee and increase in global oil prices, the
finance minister might put a cap on the countrys expenditure to avoid pressure on fiscal
deficit.
In previous years, growing fiscal deficit has given rise to the balance of payment crises. But
in the recent years, the government has taken action steps to correct the situation by cutting
service taxes, excise duty and carefully stepping up government expenditure.
Also, when the cabinet decided to come out with the Food Security Bill which guaranteed
quality food grains at subsidized rates, the concern of fiscal deficit slipping by 0.5 percent
was predicted by experts. And then earlier in July, the Government of India reassured the
nation that execution of the Food Security Bill will not affect the fiscal deficit target for the
year.
Fiscal deficit has been a key concern for credit rating agencies and RBI is likely to be on alert
when it pays its debt because paying high interests with cautious investors amid rising
deficits might not be considered a smart move.

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HOW FISCAL DEFICIT CAN BE BAD FOR INDIA

A large fiscal deficit is an indication that the economy is in trouble and will have reasons to
worry. A high fiscal deficit could pose an inflation risk, minimize the growth of the economy,
doubt the governments abilities; it could affect the countrys sovereign rating, which in turn
will limit foreign investors from looking at India as one of the investment hubs.
It is believed that high fiscal deficit can be corrected. For example, if the government could
not control its expenditures, it could raise taxes to cover up for the extra amount of money
spent. When taxes increase, consumers will involuntarily have to cut down on their
expenditure to pay the government.
Also, the government expenditure puts pressure on interest rates creating a negative impact
on savings. And yes, the Indian government can choose to import money into the country to
balance the soaring fiscal deficit, but this move could appreciate the countrys currency and
the government will have to pay interest on its borrowings, eventually increasing the deficit
and affect the countrys economic growth. Therefore, delay in adjusting high fiscal deficit
shows that the government cannot control its finances properly.

Did you know that several government projects are stalled because of high fiscal deficit?
Its because When a country labors under high fiscal deficit, it limits the governments
spending capacity and this has an effect on the continuous funds various projects need. For
example., Infrastructure projects, or welfare policies, or education and healthcare projects,
etc.
The trouble with high fiscal deficit is that it leads to higher interest rates, disturbing the entire
economy. Since the government is not earning much, it will have to restrict its expenses,
unless it chooses to borrow. And since the government abilities are doubted idue to its
incapacity to control its profligacy, it is very difficult for the government to access loans. And
even if it gets loans, they are at given at high interest rates. On the one hand, the government
borrows because it does not have enough money, and on the other hand, it has to pay more for
borrowing money. Hence, fiscal deficit leads to a slow progress of the nation.

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CONCLUSION
Fiscal deficit is an economic phenomenon, where the Government's total expenditure
surpasses the revenue generated. It is the difference between the government's total receipts
(excluding borrowing) and total expenditure. Fiscal deficit gives the signal to the government
about the total borrowing requirements from all sources.
Considering that the Indian economy is growing between 5 to 5.5 percent in the financial year
ended March 2013, fiscal deficit is definitely a challenge to the economy. According to the
World Bank, growth in India is projected to rise to 6.5 percent and 6.7 percent in FY2014 and
FY2015, respectively. Indias fiscal deficit has been the centre of debate for many occasions
this year.
On the bright side, for India, among other sources of revenue, foreign investments and inflow
of remittances from Indians living overseas has helped avoid very high deficits.
The trouble with high fiscal deficit is that it leads to higher interest rates, disturbing the entire
economy. Since the government is not earning much, it will have to restrict its expenses,
unless it chooses to borrow.
Like India, many developing countries are making an effort to resolve big fiscal deficits and
it will be possible soon with the help of our new prime minister i.e. Narendra Modi Ji.

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