Author: Parveen Kaswan (Follow for more updates)
What is fiscal deficit?
The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings needed by the government. While calculating the total revenue, borrowings are not included.
Generally fiscal deficit takes place due to either revenue deficit or a major hike in capital expenditure. Capital expenditure is incurred to create long-term assets such as factories, buildings and other development. A deficit is usually financed through borrowing from either the central bank of the country or raising money from capital markets by issuing different instruments like treasury bills and bonds.
What is the difference between fiscal deficit and primary deficit?
Primary deficit is one of the parts of fiscal deficit. While fiscal deficit is the difference between total revenue and expenditure, primary deficit can be arrived by deducting interest payment from fiscal deficit. Interest payment is the payment that a government makes on its borrowings to the creditors.
What are the views of different experts on fiscal deficit?
Economists differ widely on their views on fiscal deficit. According to John Maynard Keynes, a deficit prevents an economy from falling into recession, while another school of thought is that a country should not have fiscal deficit.
Many economists think that if the deficit is financed by raising debt from the central bank it may lead to an inflationary scenario. Higher fiscal deficit is one of the reasons for the Indian economy to have relatively higher inflation.
What is revenue deficit?
A mismatch in the expected revenue and expenditure can result in revenue deficit. Revenue deficit arises when the government’s actual net receipts is lower than the projected receipts. On the contrary, if the actual receipts are higher than expected one, it is termed as revenue surplus. A revenue deficit does not mean actual loss of revenue.
Let’s take an hypothetical example, if a country expects a revenue receipt of Rs 100 and expenditure worth Rs 75, it can result in net revenue of Rs 25. But the actual revenue of Rs 90 is realised and an expenditure is Rs 70. This translates into net revenue of Rs 20, which is Rs 5 lesser than the budgeted net revenue and called as revenue deficit.
India’s Current Account Deficit (CAD) as a percentage of gross domestic product (GDP) rose to an all-time high of 5.4 per cent in the second quarter of 2012-13 on account of widening of trade deficit and slower growth in visible, the Reserve Bank of India (RBI) said in its monthly bulletin for March.The budget 2013-14 pegged the fiscal deficit at 4.8 % and as per the revised estimate of 2012-13, it is expected to be at 5,2 % of GDP.The fiscal deficit in our country is mainly driven by revenue deficit. In the year 2011-12, the share of revenue deficit in fiscal deficit was 76.43% and for year 2013-14 expectation is about 70%. You can have a look at the targets of fiscal consolidation in given table.
To check & manage the Deficit, government has enacted an Act which is called as FRBM Act.
What is the FRBM Act?
The Fiscal Responsibility and Budget Management Act was enacted by Parliament in 2003 to bring in fiscal discipline. It received the President’s assent in August the same year. The United Progressive Alliance (UPA) government had notified the FRBM Rules in July 2004. As Parliament is the supreme legislative body, these will bind the present finance minister P Chidambaram, and also future finance ministers and governments.
How will it help in redeeming the fiscal situation?
The FRBM Rules impose limits on fiscal and revenue deficit. Hence, it will be the duty of the Union government to stick to the deficit targets. It also empowers RBI for taking measures to control Inflation. The Act also provide exception to government in case of natural calamity and national security.
As per the initial targets, revenue deficit, which is revenue expenditure minus revenue receipts, have to be reduced to nil in five years beginning 2004-05. Each year, the government is required to reduce the revenue deficit by 0.5% of the GDP. The fiscal deficit is required to be reduced to 3% of the GDP by 2008-09.It would mean reduction of fiscal deficit by 0.3 % of GDP every year. The implementation of Act was put on hold in year 2007-08 due to global financial crisis and the need for fiscal stimulus. In 2012 FRBM Act was amended and it was decided that the FRBM would target effective revenue deficit in place of revenue deficit.
How are these targets monitored?
The Rules have mid-year targets for fiscal and revenue deficits. The Rules required the government to restrict fiscal and revenue deficit to 45% of budget estimates at the end of September (first half of the financial year).
In case of a breach of either of the two limits, the FM will be required to explain to Parliament the reasons for the breach, the corrective steps, as well as the proposals for funding the additional deficit.