GOVERNMENT BUDGET AND ITS

COMPONENTS

INTRODUCTION:

Both the Government and private sector are crucial in a

mixed economy like India. The Government has to carry out
various infrastructural, economic, and welfare activities for
maximizing the welfare of the country and its people. There
is a need for a vast amount of money to finance these
activities. The government also generates revenue from
various sources like taxes, for which planning and
government policies are necessary. The ‘Budget’ is the
solution to the financial and managerial complications that
may arise in the process. It is prepared to manage the
receipts and payments of the government.

MEANING OF BUDGET:
The word “Budget” is derived from the
French word “Budgette” which means a
leather bag or a wallet. The budget
refers to an estimation of expense and
revenue generated over a certain
period. It is evaluated and compiled
periodically. Budgets can be made for
a person’s income and expenses, as
well as, that for a business, a group of
people, and most importantly, the
government.
WHAT IS GOVERNMENT BUDGET?

Government Budget is an annual

statement, showing item wise estimates
of receipts and expenditure during a
Fiscal year, that is often passed by
the legislature, approved by the chief
executive or president and presented by
the Finance Minister to the nation.
The Government Budget is also known
as the “Annual Financial Statement” of
the country.
This document estimates the
anticipated government revenues and
government expenditures for the
ensuing (current) financial year.
KEY FEATURES ABOUT GOVERNMENT
BUDGET OF INDIA:

o The budget is the most important information

document of the government because government
implements its plans and programmes through the
budget.
o Budget estimates pertain to a fixed period,
generally a year.
o Budget is prepared by government at all levels,
that is, Central Government, State Government
and Local Government prepare their respective
annual budget.
o The Central Government’s Budget is also known as
Union Budget.
o In India, the budget is presented on such a day as the President
may direct. But, by convention the Finance Minister presents the
Union Budget it on the first day of February each year so that it
can be materialised before the beginning of new financial year in
April.
o It is required to be approved by the Parliament before it
can be implemented on 1st April, the start of India’s
Financial Year.
o The financial/fiscal year is taken from 1st April to 31st
March.
o According to Article 112 of the Indian Constitution, the
Central Government must give an account of estimated
receipts and payments to the Parliament.
o The receipts and payments are presented in the estimated
figures, not the actual figures in the budget.
o Government policies are also known as Fiscal Policies.
o In India, the Finance Minister presents the annual budget of
the Government for its approval by the parliament.
o Budget impacts the economy through fiscal discipline and
resource allocation.
 o The expected revenues and expenditures are planned as
per the objectives of the Government.
o The Finance Minister reads out the “Budget Speech” in Lok
Sabha. A copy of Union Budget is laid in Rajya Sabha soon
after its presentation in the Lok Sabha.
o

How is this Budget Planned?

A government plans its budget by gauging its foreseeable

expenditure and planning to raise resources to meet these
expenses. A country’s government generates revenue primarily
through-
 tax collection,
 interest on loans provided to states,
 from fines and fees,
 alongside dividends collected from public sector
enterprises.
In turn, government spends on –
 Security
 Defence
 Staff salaries
 Providing goods and services to citizens
 Maintaining law and order
A budget is prepared by keeping these expenditures and
revenues into consideration.

What does the Budget unfold?

The Budget unfolds:

1. The financial performance of the Government during the
past year.
2. The expected financial performance and Government
policies for the coming year.
The financial performance is an explanation of what happened
during the past year. The budget’s focus is more on the other
part, i.e. Government programs and policies for the upcoming
year.
Objectives of Government Budget:
The Government prepares the budget for fulfilling certain objectives. These
objectives are the direct outcome of Government’s economic, social and political
policies.

The Government plays a vital role in increasing the welfare of

the people. Government achieves this through budget in the
following ways:

1. Re-Allocation of Resources:
It refers to the direction of resources from one use to the other.
In India, the public and private sectors play an essential role in
the economy. However, Private enterprises always aim at
maximising profits by allocating resources to those areas of
production where they can earn higher returns. There are
chances that an industry like alcohol may not promote the
welfare of people. The Government of a country directs the
distribution of resources through its resources in order to strike a
balance between the goals of profit maximization and social
welfare. For example, there is the production of both necessary
and luxury goods. Besides, the Government can influence the
allocation of resources through:
  Tax Concessions or Subsidies: Government
encourages and discourages investment in useful and
harmful goods respectively by providing concessions,
subsidies, imposing heavy taxes, etc., on their
production. For example, Government imposes heavy
taxes on producing goods that are harmful to health, like
‘cigarettes’. Similarly, Government provides subsidies for
the production of goods like ‘khadi’, which are helpful to
society.
 Directly Producing Goods and Services: If the
private sector does not take the initiative in certain non-
profitable economic activities, the Government directly
controls them, like water supply, sanitation, law and
order, national defence etc. These are called public
goods. It is also known as the allocation function as the
Government attempts to provide certain goods and
services which can not be provided through the market
mechanism. Such activities are undertaken by the
government in public interest and to raise public welfare.

2. Reducing Inequalities in Income and Wealth:

Economic inequality means unequal distribution of income and
wealth between different groups of society. The Government
aims to reduce such inequalities through its budgetary policy.
The Government aims to influence the distribution of income by
imposing taxes on the rich and spending more on the welfare of
the poor. Higher taxes can be imposed by the Government on
income earned by the rich and goods consumed by them to
reduce their income. To raise the standard of living of the poor,
the Government provides free services like education and
health. For example, Government provides free or subsidised
rates for LPG connections and food grains to the poor.
Equitable distribution is a way to achieve social justice. It is the
principal objective of a welfare-providing country like India. It is
also known, as the distribution function as Government alters the
income distribution to make it fair distribution between rich and
poor.
3. Economic Stability:
Economic Stability refers to a situation without significant
fluctuations in the price levels and stability of exchange rates in
an economy. Such fluctuations and instabilities create
uncertainties in the economy. The Government ensures
economic stability in the economy using its revenue and
expenditure. Stability can be achieved by protecting the
economy from the effects of various trade cycles and their
phases like boom, recession, depression, and recovery. Budget is
used as an essential policy to combat inflation and deflation in
the economy.
Under this:
 The Government reduces its own expenditure and
increases revenue to correct inflation (Surplus Budget).
(Inflation arises when the aggregate demand is higher
than the aggregate supply)
 The Government increases its own expenditure and
decreases revenue to correct deflation (Deficit Budget).
(Deflation arises when the aggregate demand is lower
than the aggregate supply)
 Policies of surplus budget during inflation and deficit
budget during deflation helps to maintain stability of
prices in the economy.
The Government tries to achieve economic stability by
increasing investment in the economy, which results in
development and growth.

4. Economic Growth
Economic Growth implies a sustainable increase in the real GDP
of an economy, i.e. an increase in the volume of goods and
services produced in an economy. The growth of a country
depends upon the rate of savings and investment. This will
further promote capital formation and production levels,
resulting in raising the country’s national income.
 The Government makes various policies and provisions
through its budgetary policy to enhance savings and
investment in an economy. This is done by providing
various tax rebates and other incentives for productive
ventures.
 Spending on the infrastructure of an economy enhances
the production activity in different sectors of an
economy. Government expenditure is a major factor that
generates demand for different types of goods and
services in an economy which induces growth in private
sector too.

However, before planning such expenditure, rebates and

subsidies, Government should check the rate of inflation
and tax rates. Also, there may be risk of debt trap if
loans are too high to finance the expenditure.
5. Employment Generation:
Budgetary policy focuses on employment generation through
investment in public enterprises and infrastructural projects.
Investment in infrastructural projects creates jobs for different
sections of workforce. Moreover, various schemes like MNREGA,
SJSRY, PMRY, etc are initiated to create employment in rural and
urban areas.
6. Management of Public Enterprises:
Public sector industries (especially natural monopolies) are
owned and governed by the Government and the main aim of
these industries is to promote the public’s welfare. The budget is
prepared to manage these enterprises and to provide financial
help.
7. Reducing Regional Disparities:
To remove regional disparities, the Government encourages the
setting up of production units in economically backward regions.
Various types of tax concessions are offered to production units
to take such initiatives. The Government also provides subsidies
to encourage production units to support the Government in
achieving the objective of regional balanced growth. For
Example, establishment of Special Economic Zones [ SEZs ] in
the backward regions for promoting their economic
development.
Components/ Structure of Budget

There are mainly two components of budget, i.e.,

(i) Revenue Budget (ii) Capital Budget.

Revenue Budget
The revenue budget deals with the revenue aspect of the
Government budget. It describes how the revenue is generated
or collected by the Government and how it is allocated among
various expenditure heads. A Revenue Budget is the statement
of estimated revenue receipts and estimated revenue
expenditures during the fiscal year.

Revenue budget has 2 parts:

( i ) Revenue Receipts
( ii ) Revenue expenditure

Capital Budget
The capital budget includes the capital aspect of the Government
budget. It is an account of assets and liabilities of the Central
Government, which considers changes in capital. This budget
shows the capital receipts of the Government and the
expenditure that can be met from these receipts. A Capital
Budget is the statement of estimated capital receipts and
expenditures during the fiscal year.

Capital receipts has 2 parts:

( i ) Capital Receipts
( ii ) Capital Expenditure

Budget Receipt:
Budget receipts refer to the estimated money receipts of the
government from all the sources during a given fiscal year. It shows the
break-up of revenue generated under different heads.
Budget receipts may further be classified as:
1. Revenue receipts
2. Capital receipts

REVENUE RECEIPTS:
A receipt is a revenue receipt, if neither creates a liability nor
reduces any asset. Revenue receipts refer to those receipts which
neither create any liability nor cause any reduction in the assets of
the government. They are regular and recurring in nature and
government receives them in its normal course of activities. It
includes tax revenues like income tax, corporation tax
and non-tax revenue like fines and penalties, special
assessment, escheat etc.

A receipt is a revenue receipt if it satisfies the following 2 essential

conditions:
 1. The receipt should not create a liability for the government.
2. The receipt must not cause a decrease in the assets of the
government.

TWO SOURCES OF REVENUE RECEIPTS:

1. TAX REVENUE
2. NON-TAX REVENUE

TAX REVENUE:

Tax revenue refers to sum total of receipts from taxes and

other duties imposed by the government. It is the main
source of regular receipts of the government. Government collects
various kinds of taxes from the public to meet its day-to-day expenditures and
there is a strict action against anyone who fails to pay the taxes.
Tax is a unilateral compulsory payment made by people and
companies to the government without reference to any direct
benefit in return.
The 2 aspects of tax are:
1. Tax is a compulsory payment, i.e., no one can refuse to pay
it.
2. Tax receipts are spent by the government for common
benefit of people in the country. A tax payer cannot expect
that the tax amount will be used for his direct benefit.

Tax revenue can further be classified as:

1. direct taxes
2. indirect taxes .

Direct Taxes:

A tax is a direct tax, if its burden cannot be shifted. Direct taxes refer to taxes that are
imposed on property and income of individuals and companies and their burden cannot be
shifted to the other person or entity. They are imposed on individuals and companies and
their monetary burden is borne by those on whom they are levied. The liability to pay the tax
[ i.e. impact ] and actual burden of the tax [ i.e. incidence ] lie on the same person, that is its
burden cannot be shifted to others.
They directly affect the income level and purchasing power of people and help to change the
level of aggregate demand in the economy.
Examples: Income Tax, Corporate Tax, Interest Tax, Property Tax , Wealth Tax, Death
Duty, Capital Gain Tax.
KINDS OF DIRECT TAX SYSTEMS

There can be three types of direct tax systems according to the relationship between its rate
structure and income, wealth or economic power of the tax payer.

(i) Proportional Tax System: It is a system in which the tax rate remains constant with
increase or decrease in the income.

Example: If tax rate is 10% and the annual income of a person is ₹ 1,00,000, then he will
have to pay 10,000 per year as tax. If income rises to ₹ 1,25,000 per annum, then the tax
liability will rise to 12,500 per year. In this case, burden of tax is more on the poor section as
compared to rich section.

(ii) Progressive Tax system: It is a system in which the tax rate increases with an increase in
the level of income of tax payers.

Example: Tax rate of 10% for persons earning between and 20% for persons earning between
1,00,000 and 60,000 and ₹ 1,00,000 per annum 1,50,000 per annum. In this case, burden of
tax is more on rich section as compared to poor section. India follows the progressive tax
system.

(iii) Regressive Tax System: It is a system in which the rate of tax decreases with an increase
in the income of taxpayers.

Example: If a person pays 1,000 as tax on income of 10,000, then tax rate is 10%. If his
income rises to 15,000 and he is required to pay 1,200 as tax, then the average tax rate will
fall to 8%. In this case, burden of tax is more on the poor section as compared to rich section.

INDIRECT TAXES:

A tax is an indirect tax, if its burden can be shifted. Indirect taxes are those taxes which can
be shifted to another person or entity. Their monetary burden is ultimately borne by final
users of goods and services, rather than the person on whom the tax is levied.
They are imposed on goods and services. The liability to pay the tax [ i.e. impact ] and actual
burden of the tax [ i.e. incidence ] lie on the different persons, that is its burden can be
shifted to others.
INDIRECT TAXES CAN BE AVOIDED;
Indirect taxes are compulsory payments. But, they can be avoided by not entering in those
transactions, which call for such taxes.
Examples: GST, basic customs duty, central excise and vat on petroleum products, excise
on liquor, electricity duties, etc.

DIRECT TAXES VS INDIRECT TAXES FROM SANDEEP GARG

NON TAX REVENUE:

Non tax revenue refers to the receipts of the government from
all sources other than those of tax receipts.
The main sources if non tax revenue are:
1. Interest: Government receives interest on loans given by it to
state governments, union territories, private enterprises and
general public. Interest receipts from these loans are an
important source of non-tax revenue.

2. Profits and Dividends: Government earns profit through

public sector undertakings like Indian railways, LIC, BHEL, etc. It
earns profit from the sale proceeds of the products of such
public enterprises. Government also gets dividend from its
investments in other companies.

3. Fees: Fees refer to charges imposed by the government to

cover the cost of recurring services provided by it. Such
services are generally in public interest and fees is paid by
those, who receive such services. It is also a compulsory
contribution like tax. Court fees, registration fees, import fees,
etc. are some examples of fees.

4. License Fee: It is a payment charged by the government to

grant permission for something. For example, license fee paid
for permission of keeping a gun or to obtain National Permit for
commercial vehicles.
5. Fines and Penalties: They refer to those payments which are
imposed on law breakers. For example, fine for jumping red
light or penalty for non-payment of tax. Fines are different from
taxes as the former is levied to maintain law and order,
whereas, the latter is imposed to generate revenue.

6. Escheats: It refers to claim of the government on the

property of a person who dies without leaving behind any legal
heir or a will.

7. Gifts and Grants: Government receives gifts and grants from

foreign governments and international organisations.
Sometimes, individuals and companies also voluntarily gift
money to the government. Such gifts are not a fixed source of
revenue and are generally received during national crisis such
as war, flood, etc.

8. Forfeitures: These are in the form of penalties which are

imposed by the courts for non- compliance of orders or non-
fulfilment of contracts etc.

9. Special Assessment: It refers to the payment made by

owners of those properties whose value has appreciated due to
developmental activities of the government. For example, if
value of a property near a Metro Station has increased, then a
part of developmental expenditure is recovered from owners of
such property in the form of special assessment.

TAX REVENUE VS NON TAX REVENUE FROM SANDEEP GARG

CAPITAL RECEIPTS

A receipt is a capital receipt, if it either creates a liability or

reduces an asset. Capital receipts refer to those receipts which
either create a liability or cause a reduction in the assets of the
government. They are non-recurring and non-routine in nature.

A receipt is a capital receipt if it satisfies any one of the two

conditions:

CAPITAL RECEIPTS

(i) The receipts must create a liability for the government. For
example, Borrowings are capital receipts as they lead to an
increase in the liability of the government. However, tax
received is not a capital receipt as it does not result in creation
of any liability.
(ii) The receipts must cause a decrease in the assets. For
example, receipts from sale of shares of public enterprise is a
capital receipt as it leads to reduction in assets of the
government.

Sources of Capital Receipts

Capital receipts are broadly classified into three groups:

1. Borrowings: Borrowings are the funds raised by government

to meet excess expenditure. Government borrow funds from: (i)
Open Market (Public); (ii) Reserve Bank of India (RBI): (iii)
Foreign governments (like loans from USA, England etc.); (iv)
International institutions (like World Bank, International
Monetary Fund). Borrowings are capital receipts as they create
a liability for the government.

2. Recovery of Loans: Government grants various loans to state

governments or union territories. Recovery of such loans is a
capital receipt as it reduces the assets of the government.

3. Other Receipts: These include:

(a) Disinvestment: Disinvestment refers to the act of selling a

part or the whole of shares of selected public sector
undertakings (PSU) held by the government. They are termed
as capital receipts as they reduce the assets of the
government. Government holds ownership in various PSU's in
the form of equity shares. When the government sells a part or
whole of its shares, it leads to transfer of ownership of PSU's to
the private enterprises.

(b) Small Savings: Small savings refer to funds raised from the
public in the form of Post Office deposits, National Saving
Certificates, Kisan Vikas Patras etc. They are treated as capital
receipts as they lead to an increase in liability.

Debt Creating Vs Non-Debt Creating Capital Receipts

Capital Receipts can be classified as:
1. Debt Creating Capital Receipts: These are the capital receipts
which create debts for the government. Net Borrowings by the
Government (from any source) is an example of Debt Creating
Capital Receipt.
2. Non-Debt Creating Capital Receipts: These are the capital
receipts which do not create any debt or liability for the
government. For example, Recovery of loans, disinvestments,
etc

REVENUE RECEIPTS VS CAPITAL RECEIPTS FROM SANDEEP

GARG
BUDGET EXPENDITURE:
Budget Expenditure refers to the estimated expenditure of the
government during a given fiscal year. The budget expenditure
can be broadly categorised as:
(i) Revenue Expenditure
(ii) Capital Expenditure.

Revenue Expenditure

An expenditure is a revenue expenditure, if it neither creates

any asset nor reduces any liability. Revenue expenditure refers
to the expenditure which neither creates any asset nor causes
reduction in any liability of the government.
• It is recurring in nature.
• It is incurred on normal functioning of the government and
the provisions for various services.
• Examples: Payment of salaries, pensions, interests,
expenditure on administrative services, defence services,
health services, grants to state, etc.

An expenditure is a revenue expenditure, if it satisfies the

following two essential conditions:

(i) The expenditure must not create an asset of the

government. For example, payment of salaries or pension is
revenue expenditure as it does not create any asset. However,
the amount spent on construction of Metro is not a revenue
expenditure as it leads to creation of an asset.
(ii) The expenditure must not cause decrease in any liability. For
example, repayment of borrowings is not revenue expenditure
as it leads to reduction in liability of the government.
Union Grants to states are treated as revenue expenditure,
even though some of the grants may be used for creation of
assets.
Capital Expenditure

An expenditure is a capital expenditure, if it either creates an

asset or reduces a liability. Capital expenditure refers to the
expenditure which either creates an asset or causes a reduction
in the liabilities of the government. It is non-recurring in nature.
It adds to capital stock of the economy and increases its
productivity through expenditure on long period development
programmes, like Metro or Flyover.
Examples: Loan to states and Union Territories, expenditure on
building roads, flyovers, factories, purchase of machinery,
repayment of borrowings, etc.

An expenditure is a capital expenditure, if it satisfies any one of

the following two conditions:
(i) The expenditure must create an asset for the government.
For example, Construction of Metro is a capital expenditure as it
leads to creation of an asset. However, any amount paid as
salaries is not a capital expenditure as there is no increase in
the assets.
(ii) The expenditure must cause a decrease in the liabilities. For
example, repayment of borrowings is a capital expenditure as it
leads to a reduction in the liabilities of the government.

REVENUE EXPENDITURE VS CAPITAL EXPENDITURE FROM

SANDEEP GARG. + CATEGORISATION OF BUDGET RECEIPTS
AND BUDGET EXPENDITURE THROUGH PIE CHAT FOR THE YEAR
2024-25.
Plan and Non-Plan
Expenditure:
PLAN EXPENDITURE AND NON PLAN EXPENDITURE:

An expenditure is a plan expenditure, if it arises due to

planned proposals. Planned expenditure refers to the
expenditure that is incurred on the programs detailed
in the current five-year plan.

An expenditure is a non-plan expenditure, if it is out of

the scope of government plans. Non-planned
expenditure refers to the expenditure other than the
expenditure related to the current five-year plan.

Plan expenditure vs Non plan expenditure

Difference Between Plan & Non-Plan Expenditure:

1. Plan Expenditure is spent on current
development, and investment outlays,
whereas, non-plan expenditure are spent on
the routine functioning of the Government.
2. Plan expenditure arises only when the plans
provide for such expenditure, but non-plan
expenditure is a must for every economy
and the government cannot escape from it.

DEVELOPMENT EXPENDITURE AND NON

DEVELOPMENT EXPENDITURE:

Developmental and Non-Developmental Expenditure:

An expenditure is a developmental expenditure, if it
directly adds to the flow of goods and services.
Developmental Expenditure refers to the expenditure,
which is directly related to the economic and social
development of the country. Expenditure on such
services is not a part of the essential functioning of the
Government. For example, expenditure on agricultural
and industrial development, education, health, social
welfare, scientific research, etc. Expenditure on such
services is not a part of the essential functioning of the
government. Developmental expenditure adds to the
flow of goods and services in the economy.

An expenditure is a non-developmental expenditure, if

it indirectly contributes to economic development. Non-
Development Expenditure refers to the expenditure
which is incurred on the essential goods and
services of the Government. It does not directly
contribute to economic development, but it indirectly
helps in the development of the economy. Such
expenditures are essential from the administrative
view. For example, expenditures on defence,
administrative services, police, justice, etc.

Developmental Expenditure Vs Non-Developmental

Expenditure

(1) Developmental expenditure directly contributes to

development of the economy, whereas, non-
developmental expenditure does not contribute directly
to the development, but it lubricates the wheels of
economic development;

(ii) Developmental expenditure is productive in nature

as it adds to the flow of goods and services, whereas,
non developmental expenditure is not concerned with
the productivity of working class.

BALANCED, SURPLUS AND DEFICIT BUDGET:

The difference between total estimated government receipts
and government expenditures may be zero. It may also be
surplus or deficit, as the case may be. In this sense, there can
be three types of budgets:

1. Balanced Budget: Government budget is said to be a

balanced budget if estimated government receipts are equal to
the estimated government expenditure. i.e. Balanced Budget:
Estimated Government Receipts = Estimated Government
Expenditure
Balanced Budget shows financial stability in the country. It is an
ideal situation but not practical at times of inflation or deflation.
It indicates that government is not indulging in wasteful
expenditure.

2. Surplus Budget: If estimated government receipts are more

than the estimated government expenditure, then the budget is
termed as 'Surplus Budget'.

i.e. Surplus Budget: Estimated Government Receipts >

Estimated Government Expenditure

In case of surplus budget, more money is being taken away by

the Government than being injected in the economy. It helps to
reduce the level of aggregate demand in the economy, which is
required during excess demand to control inflation.

However, during deflation, surplus budget further reduces the

level of aggregate demand, which worsens the situation.

3. Deficit Budget: If estimated government receipts are less

than the estimated government expenditure, then the budget is
termed as 'Deficit Budget.
i.e. Deficit Budget: Estimated Government Receipts <
Estimated Government Expenditure
Developing countries generally have deficit budget because
they need to incur more expenditure than the amount of
resources the economy can mobilize.
It helps to increase the level of aggregate demand in the
economy, which is required during deficient demand to control
deflation.
However, during excess demand, deficit budget would further
increase the difference between AD and AS which would lead to
inflationary gap.

MEASURES OF GOVERNMENT DEFICIT

Budgetary deficit is defined as the excess of total estimated

expenditure over total estimated revenue. When the
government spends more than it collects, then it incurs a
budgetary deficit Budgetary Deficit Total Expenditure - Total
Receipts
With reference to budget of Indian government, budgetary
deficit can be of 3 types:
(i) Revenue Deficit
(ii) Fiscal Deficit
(iii) Primary Deficit
Revenue Deficit

Revenue deficit is concerned with the revenue expenditures &

revenue receipts of the government. It refers to excess of
revenue expenditure over revenue receipts during the given
fiscal year. Revenue Deficit = Revenue Expenditure - Revenue
Receipts

Revenue deficit signifies that government's own revenue is

insufficient to meet the expenditures on normal functioning of
government departments and provisions for various services.

Implications of Revenue Deficit

o It indicates the inability of the government to meet its

regular and recurring expenditure in the proposed budget

o It implies that government is dissaving, i.e. government is

using up savings of other sectors of the economy to
finance its consumption expenditure.

o It also implies that the government has to make up this

deficit from capital receipts, ie. through borrowings or
disinvestments. It means, revenue deficit either leads to
an increase in liability in the form of borrowings or reduces
the assets through disinvestment.

o Use of capital receipts for meeting the extra consumption

expenditure leads to an inflationary situation in the
economy. Higher borrowings increase the future burden in
terms of loan amount and interest payments and increase
 in such interest burden will lead to increase in revenue
expenditure in future. This will result in further rise in
revenue deficit.
o A high revenue deficit gives a warning signal to the
government to either curtail its expenditure or increase its
revenue.

According to far-sighted approach, revenue receipts should

always be more than revenue expenditures so that surplus can
be used for development projects. However, Indian Budget is
facing revenue deficit for the past several years.

Measure to Reduce Revenue Deficit

(i) Reduce Expenditure: Government should take serious

steps to reduce its expenditure and avoid unproductive
or unnecessary expenditure.
(ii) (ii) Increase Revenue: Government should increase its
receipts from various sources of tax and non-tax
revenue.

Fiscal Deficit

Fiscal deficit presents a more comprehensive view of

budgetary imbalances. It is widely used as a budgetary
tool for explaining and understanding the budgetary
developments in India. Fiscal deficit refers to the excess
of total expenditure over total receipts (excluding
borrowings) during the given fiscal year.

Fiscal Deficit = Total Expenditure - Total Receipts

excluding borrowings** The extent of fiscal deficit is an
indication of how far the government is spending
beyond its means.
*Total Receipts excluding borrowings include:

(i) Revenue Receipts

(ii) Capital Receipts excluding borrowings (or Non-debt

creating capital receipts).

Non-debt creating capital receipts include all the capital

receipts except the borrowings. So, such receipts do not
give rise to debt. For example, recovery of loans or
proceeds from disinvestment.

Implications of Fiscal Deficit

The implications of fiscal deficit are as follows:

1. Debt Trap: Fiscal deficit indicates the total borrowing

requirements of the government. Borrowings not only
involve repayment of principal amount, but also require
payment of interest. Interest payments increase the
revenue expenditure, which leads to revenue deficit. It
creates a vicious circle of fiscal deficit and revenue
deficit, wherein government takes more loans to repay
the earlier loans. As a result, country is caught in a debt
trap.

2. Inflation: Government mainly borrows from Reserve

Bank of India (RBI) to meet its fiscal

deficit. RBI prints new currency to meet the deficit

requirements. It increases the money supply in the
economy, which leads to increase in general price level
and creates inflationary pressure.

3. Foreign Dependence: Government also borrows from

rest of the world, which raises its dependence on other
countries.
 4. Hampers the future growth: Borrowings increase the
financial burden for future generations. It adversely
affects the future growth and development prospects of
the country.

Fiscal Deficit gives borrowing requirements of the government.

So, it must not be allowed to rise beyond manageable limits.
The safe limit of fiscal deficit is considered to be 3% of GDP.
Greater fiscal deficit implies greater borrowings by the
government. So, a high fiscal deficit is inherently bad for the
health of an economy,

Ways to Calculate Fiscal Deficit

Fiscal deficit can be calculated by any of the following methods:

(1) Fiscal Deficit Total Expenditure - Total Receipts excluding

borrowings

(ii) Fiscal Deficit (Revenue Expenditure + Capital Expenditure)-

(Revenue Receipts + Capital Receipts excluding Borrowings)

OR

Fiscal Deficit (Revenue Expenditure - Revenue Receipts) +

(Capital Expenditure - Capital Receipts excluding Borrowings)

OR

Fiscal Deficit Revenue Deficit + (Capital Expenditure - Capital

Receipts excluding Borrowings)
 At times, only the total borrowings are given. In such a case,
Fiscal Deficit = Total Borrowings.

Sources of Financing Fiscal Deficit

Government has to look out for different options to finance the

fiscal deficit. The main two sources are:

1. Borrowings: Fiscal deficit can be met by borrowings from the

internal sources (public, commercial banks etc.) or the external
sources (foreign governments, international organisations etc.).

2. Deficit Financing (Printing of new currency): Government

may borrow from RBI against its securities to meet the fiscal
deficit. RBI issues new currency for this purpose. This process is
known as deficit financing.

Borrowings are considered a better source as they do not

increase the money supply, which is regarded as the main
cause of inflation. On the other hand, deficit financing may lead
to inflationary trends in the economy due to more money
supply.

FISCAL DEFICIT VS REVENUE DEFICIT FROM SANDEEP GARG

Primary Deficit

Primary deficit refers to difference between fiscal deficit of the

current year and interest payments on the previous borrowings.
Primary Deficit = Fiscal Deficit - Interest Payments

The total borrowing requirement of the government includes

the interest commitments on accumulated debts. Primary
deficit reflects the extent to which such interest commitments
have compelled the government to borrow in the current
period.

Implications of Primary Deficit

It indicates, how much of the government borrowings are going

to meet expenses other than the interest payments. The
difference between fiscal deficit and primary deficit shows the
amount of interest payments on the borrowings made in past.
So, a low or zero primary deficit indicates that interest
commitments (on earlier loans) have forced the government to
borrow.

What happens when Primary Deficit = 0

We know Primary Deficit = Fiscal Deficit - Interest Payments If

Primary Deficit is zero, then Fiscal Deficit - Interest Payments

Fiscal Deficit = Interest Payments

It means, that the government has to borrow only on account of

interest payments.

Primary Deficit is the root Cause of Fiscal Deficit

In India, interest payments have considerably increased in the
recent years. High interest payments on past borrowings have
greatly increased the fiscal deficit. To reduce the fiscal deficit,
interest payments should be reduced through repayment of
loans as early as possible.

PRIMARY DEFICIT VS FISCAL DEFICIT FROM SANDEEP GARG

Conclusion

In summary, the interim budget of 2024 has laid out a

commendable framework aimed at bolstering various
sectors crucial for the advancement of the Indian economy.
The emphasis on affordable housing, healthcare,
agriculture, connectivity, environment, tourism, and duty
fulfilment underscores the government's commitment to
comprehensive development