Types of Deficits in India, Their Implications, and Monetization

Introduction

A budget deficit occurs when government expenses exceed revenue. It can be used as an indicator of the financial health of a country. It is a term more commonly used to refer to government spending and receipts rather than businesses or individuals. 

When a budget deficit occurs, it means that the current expenses surpass the income generated from regular operations. To correct its nation’s budget deficit, often referred to as a fiscal deficit, a government may cut back on certain expenditures or increase revenue-generating activities.

Different Types of Deficit

Here are the different types of deficits and the methods to calculate them.

A. Revenue Deficit

• This deficit is seen when the actual amount of revenue or expenditure does not correspond with the budgeted revenue or expenditure.
• Revenue Deficit= Revenue Expenditure − Revenue Receipts
  • In 2022-23, the revenue deficit was reported to be 4.1% of GDP.  
• Revenue Surplus: When the net income is more than the net expenditure this scenario is known as Revenue surplus.
• Scope: It only accounts for transactions affecting the current income and expenditure of the government.
• Government Borrowing: A revenue deficit indicates government dis-saving, utilising savings from other economic sectors to finance part of its consumption expenditure, thereby necessitating government debt for both investment and consumption requirements.
  • Such borrowing is considered regressive as it is for consumption and not for creating assets.

B. Fiscal Deficit (UPSC 2017)

• Gross Fiscal Deficit = Total Expenditure − Revenue Receipts+Non-debt creating capital receipts.
  • Non-debt-creating Capital Receipts: Include recoveries of loans and proceeds from the sale of PSUs, which do not give rise to debt.
  • In 2022-23 fiscal deficit amounting to 6.4% of GDP, indicates the total borrowing requirements from all sources:
  • Financing the Fiscal Deficit: The fiscal deficit will have to be financed through borrowing, it indicates the total borrowing requirements of the government from all sources
• Gross Fiscal Deficit (From the financing side) = Net borrowing at home + Borrowing from RBI + Borrowing from abroad.
  • Net Borrowing at Home: includes directly borrowing from the public through debt instruments and indirectly from commercial banks through SLR.
• Significance of Fiscal Deficit: 
  • It is a crucial indicator of the financial health of the public sector and economic stability.
  • A significant share of revenue deficit in fiscal deficit implies a large portion of borrowing is used for consumption expenditure rather than investment.

C. Primary Deficit

• Gross Primary Deficit= Gross Fiscal Deficit – Net interest liabilities.
  • Net Interest Liabilities: These include interest payments minus interest receipts by the government on net domestic lending.

D. Effective Revenue Deficit

• Effective revenue deficit excludes certain revenue expenditures that are considered productive or developmental. 
• The idea is to distinguish between regular revenue expenditures and those that contribute to capital formation or asset creation.

Significance of Deficit Measures – Implications and Consequences

• Importance of Deficit Measures: These deficit measures are crucial for evaluating the government’s fiscal discipline, borrowing requirements, and the economic impact on stability and growth.
• Persistent Deficits: Especially revenue deficits, may lead to unsustainable borrowing, accumulation of debt, and eventual expenditure cuts, which could adversely affect growth and welfare. (UPSC 2016) 

Monetization of Deficit and Deficit Financing (UPSC 2022)

Conclusion

• Various types of deficits, such as fiscal and revenue deficits, highlight the imbalance between government expenditures and revenues. 
• Financing these deficits through borrowing underscores the importance of prudent fiscal management to avoid unsustainable debt accumulation, which could hamper economic growth and welfare in the long term.

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