Introduction to Union Budget and deficit
The Union Budget is the annual financial statement of the Government of India that presents estimated receipts and expenditures for a financial year. It reflects the government’s fiscal policy priorities, such as economic growth, welfare, infrastructure development, and financial stability. A deficit arises when government expenditure exceeds its receipts.
Meaning of budget deficit
In simple terms, a budget deficit occurs when the government’s total expenditure is more than its total receipts during a financial year. Receipts include revenue receipts like taxes and non-tax income, and capital receipts like disinvestment and borrowings. Expenditure includes revenue expenditure and capital expenditure.
Deficits are not always negative. In a developing economy like India, a reasonable level of deficit is often used to promote growth, build infrastructure, and support welfare schemes. However, excessive deficits can lead to inflation, high public debt, and pressure on interest rates.
Revenue deficit
Meaning and explanation
Revenue deficit occurs when the government’s revenue expenditure exceeds revenue receipts. Revenue receipts mainly include tax revenue and non-tax revenue, while revenue expenditure includes expenses such as salaries, pensions, subsidies, interest payments, and administrative costs.
A revenue deficit indicates that the government is not able to meet its day-to-day expenses from its regular income. This means the government is borrowing even to meet consumption expenditure rather than for asset creation.
Importance and implications
A high revenue deficit is considered unhealthy for the economy because it reduces savings available for investment. It also increases dependence on borrowings, which adds to future interest burden. From an exam perspective, it is important to highlight that reduction of revenue deficit improves fiscal discipline and creates space for productive capital expenditure.
Fiscal deficit
Meaning and explanation
Fiscal deficit is the most important and widely discussed deficit concept in the Union Budget. It represents the total borrowing requirement of the government. Fiscal deficit occurs when total expenditure exceeds total receipts excluding borrowings.
In other words, fiscal deficit shows how much the government needs to borrow during the year to finance its expenditure.
Significance of fiscal deficit
Fiscal deficit reflects the government’s impact on the economy. A higher fiscal deficit means higher government borrowing, which can lead to increased interest rates and crowding out of private investment. At the same time, during economic slowdown, a higher fiscal deficit may be justified to stimulate demand.
Primary deficit
Meaning and explanation
Primary deficit is obtained by subtracting interest payments on past borrowings from fiscal deficit. It shows the deficit excluding the burden of past debt.
Primary deficit indicates the extent to which current government expenditure exceeds its receipts, ignoring interest obligations. If primary deficit is zero, it means the government is borrowing only to pay interest on previous loans.
Importance of primary deficit
Primary deficit helps in understanding whether the government’s current fiscal policy is expansionary or contractionary. A declining primary deficit indicates better fiscal management and reduced dependence on debt for current expenditure.
Effective revenue deficit
Meaning and explanation
Effective revenue deficit is the difference between revenue deficit and grants given by the government for creation of capital assets. These grants, although shown as revenue expenditure, actually lead to asset creation in states or other institutions.
Effective revenue deficit provides a more realistic picture of the government’s revenue imbalance. It helps policymakers focus on the quality of expenditure rather than just the size of the deficit.
Monetised deficit (conceptual understanding)
Earlier, monetised deficit referred to the portion of fiscal deficit financed by borrowing from the central bank. This involved printing of new money, which often led to inflation. In India, with the adoption of fiscal responsibility norms and changes in RBI’s role, direct monetisation of deficit has been largely phased out.
It is sufficient to explain the concept and its inflationary impact.
Fiscal Responsibility and Budget Management (FRBM) framework
India follows the FRBM framework to ensure fiscal discipline. The FRBM Act sets targets for fiscal deficit reduction and debt management. It aims to maintain macroeconomic stability, control inflation, and ensure sustainable growth.
Understanding the FRBM framework is important for linking deficit concepts with long-term fiscal sustainability in exam answers.
Impact of budget deficits on economy and banking
Budget deficits influence inflation, interest rates, and liquidity in the economy. Higher government borrowing can raise interest rates, affecting loan pricing and credit demand. Banks closely track fiscal deficit trends as they impact government securities market, bond yields, and overall monetary conditions.
For banking professionals, deficit concepts help in understanding policy signals and economic outlook.