A deficit can be defined as a value by which the total amount falls short of a reference amount. In terms of economics, a deficit is an excess expenditure made by a body apart from the revenue in a reference period.
(1) REVENUE DEFICIT: Revenue Receipt – Revenue Exp.
It signifies if the day to day expenditure of the govt. can be met by its day to day income.
This is a very important deficit.
This deficit was so important that the FRBM Act. 2003 laid down rules to bring this deficit to absolute 0 by 2008-09.
(2) TOTAL /BUDGET DEFICIT: Total Exp.-Total Receipt
(RE+CE) – (RR+CR)
(3) FISCAL DEFICIT: Total expenditure – Total receipts excluding borrowings= Total Exp. – (Revenue Receipts + Non Debt Creating Capital Receipts).
FD is reflective of the total borrowing requirements of Government.
Where, Non debt creating capital receipts omits the Loans/Borrowings
(4) PRIMARY DEFICIT: Fiscal Deficit- Interest Payment
(5) EFFECTIVE REVENUE DEFICIT: Revenue Deficit – Grants given by Central Govt. to state Govts.
- This was introduced in 2012 – 2013.
- Though this is an expenditure to Central Govt., but it creates growth in the economy and should not be treated as unproductive in nature.
(6) MONETISED DEFICIT/DEFICIT FINANCING: It means net addition of RBI’s credit to the Govt. in the overall market borrowing of the govt. Govt. market borrowing means that it borrows from banks and Financial Institutions. To the extent it borrows from RBI, there is a creation of fresh currency by the RBI which leads to monetization of the economy. Hence it is called as monetized deficit. It is also called as Deficit Financing.
INTERIM BUDGET ESTIMATES 2019-20:
- Fiscal deficit has been reduced to 3.4% of GDP.
- Government has target to keep fiscal deficit at 3.1 % in next financial year (2019-2020)
Fiscal Responsibility and Budget Management Act, 2003:
In 1980s, India saw a sharp deterioration of the fiscal situation, which ultimately culminated in the balance of payments crisis of 1991. Within a decade of economic liberalisation, the fiscal deficit and debt situation again seemed to head towards unsustainable levels around 2000. At that time, a need to institutionalize a new fiscal discipline framework. Under the Fiscal Responsibility and Budget Management Act (FRBMA) 2003, both the Centre and States were supposed to wipe out revenue deficit and cut fiscal deficit to 3% of GDP by 2008-09.
The key provisions of the Act as well as FRBM rules are as follows:
- Every year the government will bring down revenue deficit by 0.5% and eliminate it by 2007-08.
- Every year, the government will bring down fiscal deficit by 0.3% and bring it down to 3% by 2007-08.
- Total liabilities of the Union Government should not rise by more than 9% a year.
- Union Government would not give guarantee to loans raised by PSUs and State governments for more than 0.5% of the GDP in aggregate.
- Union Government would place three more documents along with the budget documents viz. Macroeconomic Framework Statement, Medium Term Fiscal Policy Statement and the Fiscal Policy Strategy Statement.
- At the end of second quarter, the Finance Minister would make a statement on the trend of fiscal indicators and corrective measures taken thereof.
- However, due to the 2007 international financial crisis, the deadlines for the implementation of the targets in the act was initially postponed and subsequently suspended in 2009. In last few years, the act has been largely neglected.
APSC Prelims Questions
- Deficit financing means that the government borrows money from the- (2016)
UPSC Previous Years Prelims Questions:
- There has been a persistent deficit budget year after year. Which action/actions of the following can be taken by the Government to reduce the deficit? (2017)
- In India, deficit financing is used for raising resources for (2013)
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