Economics Project

Meaning of Revenue Deficit:

Revenue deficit is the gap between the consumption
expenditure (revenue expenditure) of the Government
(Union or the State Governments) and its current
revenues (revenue receipts). This happens when the
actual amount of revenue and/or the actual amount of
expenditures do not correspond with budgeted
revenue and expenditures. This is the opposite of a
revenue surplus, which occurs when the actual
amount of net income exceeds the projected amount.
It should be noted that revenue deficit does not mean the
actual loss of revenue. Let’s understand the same with
the help of an example. If the government spends Rs
100 and earns Rs 125, the net revenue will be Rs 25.
However, if the government has estimated expenditure
at Rs 100, and earning at Rs 130, then its expected
revenue would be set at Rs 30. But, since the actual
earning is Rs 25, the it will lead to a revenue deficit of Rs
5 (Expected Revenue Rs 30- Achieved Revenue Rs 25).
It also indicates the extent to which the government
has borrowed to finance the current expenditure.
Revenue receipts consist of tax revenues and non-tax
revenues. Tax revenues comprise proceeds of taxes
and other duties levied. The expenditure incurred for
normal running of government functionaries, which
otherwise does not result in creation of assets is called
revenue expenditure. Examples of revenue
expenditure are Interest Payments and Servicing of
Debt, Pensions and (Union government’s) expenditure
on Grants-in-Aid and contributions to States and Union
Territories (State Governments to incur expenditure
towards Grants-in-Aid and contribution to their Local
Bodies). Even though some of these grants may be
used for creation of assets, all grants given by the
Union Government to State Governments/Union
Territories and other entities are also treated as
revenue expenditure. In the Union Budget (2011-12) a
new methodology of capturing the ‘effective revenue
deficit’ has been worked out, which takes into account
those expenditures (transfers) in the form of grants for
creation of capital assets. If a business or government
has a revenue deficit that means its income isn't
enough to cover its basic operations. When that
happens, it may make up for the revenue it needs to
cover by borrowing money or selling existing assets.
Elimination of the revenue deficit has been a priority
for Governments, both the Union and at the State-
levels, as a revenue deficit may pre-empt resources
which otherwise would be available for capital
investments. To remedy a revenue deficit, a
government can choose to raise taxes or cut
expenses. Similarly, a company with a revenue deficit
can make improvements by cutting variable costs,
such as materials and labor. Fixed costs are more
difficult to adjust because most are established by
contracts, such as a building lease. The government
can make up this deficit from capital receipts, i.e.
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. 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.
Meaning of Fiscal Deficit:
A fiscal deficit occurs when a government's total
expenditures exceed the revenue that it generates,
excluding money from borrowings. It is an indication of
the total borrowings needed by the government. While
calculating the total revenue, borrowings are not
included. Deficit differs from debt, which is an
accumulation of yearly deficits. A fiscal deficit is
regarded by some as a positive economic event. For
example, economist John Maynard Keynes believed
that deficits help countries climb out of
economic recession. On the other hand, fiscal
conservatives feel that governments should avoid
deficits in favor of a balanced budget policy. Fiscal
Deficit is important as the government's ability to help
growth and welfare increases. Government can always
return the loans when its revenue improves due to tax
buoyancy. However Fiscal Deficit becomes problematic
and even destabilizing when it overshoots a rational
threshold. Fiscal deficit may cause macroeconomic
instability by inflating the economy as money supply
rises. If the funding route is through RBI monetization, it
means inflation and instability. Large deficits will require
higher taxes in long term to cover the burden in internal
debts. The causes of a fiscal deficit are both simple and
complex. At its most rudimentary level of analysis, a
fiscal deficit is caused when a government spends more
than it collects in taxes. Reducing tax rates may also
cause a deficit, if spending isn't reduced to account for
the decrease in revenue. Periods of economic growth
and economic decline can have a tremendous effect on
the ability of a government to finance its spending. In
fact, a fiscal deficit can occur even if a government
doesn't increase its spending one cent or lower its tax
rate one percent. A fiscal deficit also takes place either
due to 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. In nutshell it
can be said that Fiscal Deficits must be moderated as
they are desirable within limit but hurtful beyond the
limits and can inflate the economy.
Meaning of Primary Deficit:
The Primary Deficit is the difference between the fiscal
deficit of current year and the interest paid on the previous
borrowings. In other words, whereas fiscal deficit indicates
borrowing requirement inclusive of interest payment,
primary deficit indicates borrowing requirement exclusive
of interest payment (i.e., amount of loan). Thus, primary
deficits are government’s borrowings exclusive of interest
payment. Generally, the loan raised by the government is
inclusive of the interest amount, and if that amount is
deducted from the principal loan amount, the balance
amount is called as the primary deficit. Generally, the loan
raised by the government is inclusive of the interest
amount, and if that amount is deducted from the principal
loan amount, the balance amount is called as the primary
deficit. The purpose of measuring such deficit is to know
the amount of borrowings that government can utilize in
the expenses other than the interest payments. It shows
how much government borrowing is going to meet
expenses other than Interest payments. Thus, zero
primary deficits mean that government has to resort to
borrowing only to make interest payments. To know the
amount of borrowing on account of current expenditure
over revenue, we need to calculate primary deficit. Thus,
primary deficit is equal to fiscal deficit less interest
payments. Fiscal deficit reflects the borrowing
requirements of the government for financing the
expenditure inclusive of interest payments. As against it,
primary deficit shows the borrowing requirements of the
government including interest payment for meeting
expenditure. Thus, if primary deficit is zero, then fiscal
deficit is equal to interest payment. Then it is not adding to
the existing loan. Thus, primary deficit is a narrower
concept and a part of fiscal deficit because the latter also
includes interest payment. It is generally used as a basic
measure of fiscal irresponsibility. The difference between
fiscal deficit and primary deficit reflects the amount of
interest payments on public debt incurred in the past.
Thus, a lower or zero primary deficits means that while its
interest commitments on earlier loans have forced the
government to borrow, it has realized the need to tighten
its belt.
2014-15:
The NDA government was able to rein in the fiscal deficit
for 2014-15 at 4% of gross domestic product, lower than
the target of 4.1% against the backdrop of a challenging
revenue situation and skepticism about the ability to meet
the tough target. The government had taken several
measures, including a close watch as well as better
revenue mop up. According to the finance ministry
statement, as a result of prudent policies and commitment
to fiscal consolidation, the fiscal deficit at the end of the
year stood at Rs. 5 lakh crores, which was 98% of the
projected figure in RE (revised estimated) 2014-15. Fiscal
deficit number showed the fiscal health of the
Government. Most of the international rating agencies
closely watch this number. Easing fiscal constraint was
also one of the reasons for lowering the benchmark
interest rate, repo rate (the rate at which RBI lends to the
banks) by 50 basis points in two phases fist in January
and then in March. Lower spending than budgeted helped
compress deficit to below budgeted. The total spending for
the year was a massive Rs 1.5 lakh crore less than initially
budgeted, marking one of the sharpest compressing in
recent times. Tax authorities managed to collect over Rs
12.45 lakh crore during the period of 2014-15, which was
9 per cent more than 2013-14. This collection was 9.8 per
cent of GDP. Non debt capital receipts also helped the
Government to improve its kitty. Such earnings which also
comprise of disinvestment stands at Rs.43,439 crore with
an increase of 4 per cent. On the expenditure front, actual
number was also below the RE. In terms of plan
expenditure, the RE was Rs 4.68 lakh crore, but actual
expenditure was Rs 4.36 lakh crore. Similarly, unplanned
expenditure came down to Rs 11.91 lakh crore from the
RE of Rs 12.13 lakh crore.

The Finance Ministry also announced that revenue deficit

also came down to 2.8 per cent as against the revised
estimate of 2.9 per cent. This deficit refers to mismatch in
the projected earning ad expenditure. Since the
Government managed to collect more taxes than it was
expecting, it impacted positively not just the revenue but
also fiscal deficit too.
2015-16:
Government achieved the fiscal deficit target of 3.9% of
GDP in 2015-16. Fiscal deficit was 3.9% of GDP or Rs
5.32 lakh crore in 2015-16. This was a significant
improvement over that of 4.1% in 2014-15 and 4.7% in
2013-14. The deficit in April was 23% of the budget
estimate, but still the government was able to contain the
shortfall at 3.92% of GDP for FY16. With growth of 7.6% in
GDP in the whole of 2015-16, India continued to remain a
bright spot in world economy with robust macroeconomic
and fiscal parameters. The government set up a
committee under former revenue secretary NK Singh to
look at fiscal consolidation and prudence and the changes
required in the context of the uncertainty and volatility in
the global economy. For 2016-17, the government set
aims to further bring down the fiscal deficit—the gap
between expenditure and revenue—to 3.5%. The CGA
further said revenue deficit during the last fiscal was 2.5%
of GDP. As per the provisional data, the fiscal deficit in
April was ₹ 1.37 lakh crore, which is 25.7% of the Budget
estimate as against 23% a year ago. Total expenditure of
the government in April was ₹ 1.61 lakh crore, or 8.2% of
the full-year estimate. Of the total expenditure, Plan
spending was ₹ 45,543 crore while for non-Plan, it
was ₹ 1,16,442 crore.

The revenue deficit was ₹ 1,19,075 crore, or 33.6%.

Revenue collection was ₹ 22,075 crore, or 1.6%, of the
estimate. Total receipts of the government—from revenue
and non-debt capital—in April stood at ₹ 24,659 crore.
2016-17:
Shrugging aside demands for digressing from his fiscal
consolidation road map, finance minister Arun Jaitley
stuck to the fiscal deficit target of 3.5% of gross domestic
product (GDP) for 2016-17, after achieving the 3.9% of
GDP target in 2015-16. Presenting his third budget,
Jaitley, however, said he will set up a committee to review
the Fiscal Responsibility and Budget Management
(FRBM) Act and determine whether there should be a
range for fiscal deficit targets, rather than set numbers, to
provide the necessary policy space to governments. The
Economic Survey advocated a review of the medium-term
fiscal consolidation framework and recommended that the
government “purchase insurance" against downside risks
to the economy by increasing public investment rather
than reducing the fiscal deficit significantly. The survey
said it may be hard to endlessly expect significantly higher
growth impetus from consumption and that the
government’s focus on fiscal consolidation limits the option
of raising general government consumption
expenditure. India’s fiscal deficit in the year ending in
March 2017 came in at 3.5 percent of gross domestic
product, in line with the budgeted estimates. The
Controller General of Accounts said that the fiscal deficit
was 3.51 per cent of the GDP or a total of 5.35 lakh crore
in 2016-17. For 2017-18, the government aimed to further
bring down the fiscal deficit to 3.2 per cent. As per the
provisional data, the fiscal deficit in the April 2017 was Rs.
2.05 lakh crore, which was 37.6 per cent of the Budget
Estimate. Total expenditure of the government in April was
2.42 lakh crore or 11.3 per cent of the full-year estimate.
Total receipts of the government, from revenue and non-
debt capital in April stood at Rs. 36,529 crore.

The CGA further said that the revenue deficit was 2.02 per
cent of the GDP. The revenue deficit during April was
1,78,383 crore or 55 per cent. Revenue collection was
35,081 or 2.3 per cent the estimate.
2017-18
India’s fiscal deficit in the year ended March 2018 came in
at 3.53% of gross domestic product, in line with the
revised estimates. India had revised its fiscal deficit target
in February to 3.5% of GDP from 3.2% of GDP for the
2017/18 fiscal year. In his last full budget, Jaitley also
accepted key recommendations of the NK Singh
Committee on fiscal discipline to reduce debt-to-GDP ratio
to 40% by 2024-25 from 50.1% in 2017-18 and has
introduced amendments to the present Fiscal
Responsibility and Budget Management Act. The
government now aimed to reduce its debt-to-GDP ratio to
48.8% in 2018-19, 46.7% in 2019-20 and 44.6% in 2020-
21, while fiscal deficit as a percentage of GDP is targeted
to be reduced to 3.3%, 3.1% and 3%, respectively during
the same period. The government also marginally
increased its borrowing programme to Rs6.06 trillion for
the next fiscal from Rs6.05 trillion in that year. The
government achieved the fiscal deficit target of 3.5% of
GDP after cutting down capital expenditure by Rs36,000
crore in 2017-18. A shortfall of Rs50,000 crore on account
of the goods and services tax (GST) forced the
government to revise its fiscal deficit target. In the end, the
shortfall for the 2017/18 fiscal year was Rs5.9 trillion
($87.53 billion). New Delhi got 12.4 trillion rupees in net
tax receipts during the fiscal year.
However, the more worrying aspect was that the
government’s revenue deficit shot up to 2.6% of GDP in
2017-18 from the budget estimate of 1.9% of GDP,
showing signs of the deteriorating quality of fiscal
consolidation. This was also due to Rs1.1 trillion increase
in revenue expenditure during the year. Jaitley attributed
the slippage to the government receiving GST revenue for
11 months in 2017-18 (a shortfall of Rs50,000 crore) and

facing a shortfall in non-tax revenue due to lower receipts

from spectrum auction. Part of the shortfall was met
through higher direct tax collections and disinvestment.
2013-14:
The fiscal deficit in 2013—14 stood at 4.5 per cent of
GDP, lower than 4.6 per cent projected in the revised
estimate, mainly on account of curbs on government
expenditure. The fiscal deficit, the gap between
government’s expenditure and revenue, in actual terms
was Rs 5.08 lakh crore as against 5.24 lakh crore
projected in the revised estimate. The government’s total
expenditure worked out to be Rs 15.63 lakh crore in the
last fiscal
as
against
the
original
budget
estimate
Rs 16.65
lakh
crore. The expenditure estimate was later revised
downwards to Rs 15.90 lakh crore in the interim budget.
The revenue collection was Rs 10.15 lakh crore. The
revised target was Rs 10.29 lakh crore. The CGA data
revealed that government's total receipts, including non-
debt capital receipts, where be Rs 10.55 lakh crore. The
revised estimate was Rs 10.65 lakh crore. The Plan
expenditure was Rs 4.53 lakh crore and non-Plan
spending Rs 11.10 lakh crore.
Bringing Down Fiscal Deficit:
Large fiscal deficit has two bad consequences. First, it
leads to excessive Government borrowing from the market
which causes rise in market interest rate. Higher market
interest rate tends to reduce private investment. Further, it
reduces the resources available for private sector
investment. Second, the extent to which a large fiscal
deficit is financed by borrowing from the Reserve Bank of
India which issues new currency (which is called reserve
money or high-powered money) for the government. This
causes greater expansion in money supply through the
process of money multiplier and generates inflationary
situation in the economy. Thus, to check the rate of
inflation, fiscal deficit has to be reduced through both
raising revenue of the government and reducing
government expenditure. In the Indian context, the
following measures can be adopted to reduce fiscal deficit
and thereby to reduce inflationary pressures in the
economy.

We first spell out the measures which may be adopted to

reduce government expenditure and then describe
measures for raising Government revenue.
1. A drastic reduction in expenditure on major subsidies
such as food, fertilizers, exports, electricity to curtail public
expenditure. A huge sum of money equal to Rs. 20,000
crores are spent on major subsidies on food, fertilizers,
export promotion by the central government. Without a
drastic cut in subsidies over time it is difficult to reduce
public expenditure to an appreciable degree.

2. Die huge sum of money is spent by the government on

LTC (Leave Travelling Concessions), bonus, leave
encashment etc. A reduction in expenditure on these is
desirable if the government is determined to cut public
expenditure.
3. Another useful measure to cut public expenditure is to
reduce interest payments on past debt. In India, interest
payments account for about 40 per cent of expenditure on
revenue account of the central government. In our view,
funds raised through disinvestment in the public sector
should be used to retire a part of old public debt rather
than financing current expenditure. Retirement of public
debt quickly will reduce burden of interest payments in
future.
4. Budgetary support to public sector enterprises other
than infrastructure projects should be substantially
reduced. Further, public sector enterprises should be
asked to raise funds from the market and banks.

5. Austerity measures should be adopted to curtail

unnecessary expenditure in all government departments.
To reduce fiscal deficit and thereby check rise in inflation
rate, apart from reducing government expenditure,
government revenue has to be raised, some ways of doing
this are:
1. As regards mobilizing resources to increase public
revenue, it may be noted that the policy of moderate taxes
with simplified taxation structure should be followed. This
will help to increase public revenue rather than reduce it.
High marginal rates of taxes should be avoided as they
serve as disincentives to work more, save more and invest
more. Further, high marginal rates of direct taxes cause
evasion of taxes.
2. In India, the tax base is narrow for both direct and
indirect taxes’, only about 2 per cent of population pays
income tax. To increase revenue from taxation, tax base
should be broadened by taxing agricultural incomes and
incomes derived from unorganized industrial and services
sectors. The various exemptions and deductions provided
in the income and wealth taxes should be withdrawn to
broaden the tax base and collect more revenue. It may be
noted that the Indian experience of the last 50 years
reveals that these exemptions and deductions do not
promote the intended objectives.
3. As is well known, there is a huge amount of black
money in the Indian economy which has come into
existence as a result of tax evasion. In the last VDIS
(Voluntary Disclosure Income Scheme) in 1997-98, more
than, 10,000 crores of rupees were collected. However, a
much larger amount of black money still exists in the
economy. Not only the current black money has to be
mopped up but also tax evasion that occurs every year
has to be prevented by strict enforcement of the tax laws.
4. To mobilize more resources through indirect taxes,
more commodities should be brought within the tax net.
5. The past experience has shown that various tax
concessions which have been given in income taxes and
indirect taxes for promoting employment, industrial
development of backward regions and for other such
social objectives do not actually serve the intended
purposes and are largely used for evading taxes. These
concessions should therefore be withdrawn to collect more
revenue from taxes and the social objectives should be
served by adopting more effective policy instruments.
6. Lastly, there should be restructuring of public sector
enterprises so that they should make some surpluses at
least for their own development so that their dependence
on government’s budgetary resources should be
dispensed with. For this purpose, their pricing policy
should be such that it recovers at least user cost.
To sum up, with the adoption of above measures of
reducing public expenditure and enhancing public
revenue, it will be possible to reduce fiscal deficit to a safe
limit. The reduction in fiscal deficit will prevent the
emergence of excess demand in the economy and
thereby help in controlling inflation and achieving price
stability.

Analysis and conclusion

Large fiscal deficit has two bad consequences. First, it

leads to excessive Government borrowing from the market
which causes rise in market interest rate. Higher market
interest rate tends to reduce private investment. Further, it
reduces the resources available for private sector
investment. Second, the extent to which a large fiscal
deficit is financed by borrowing from the Reserve Bank of
India which issues new currency (which is called reserve
money or high-powered money) for the government. This
causes greater expansion in money supply through the
process of money multiplier and generates inflationary
situation in the economy. Thus, to check the rate of
inflation, fiscal deficit has to be reduced through both
raising revenue of the government and reducing
government expenditure. Also, in an emerging economy
like India, a higher fiscal deficit leaves little room for
interest rate cuts. A higher interest rate may affect private
investments from taking off in a growing economy like
India. Banks have already witnessed a slowdown in credit
takeoff.
To sum up, with the adoption of the measures listed of
reducing public expenditure and enhancing public
revenue, it will be possible to reduce fiscal deficit to a safe
limit. The reduction in fiscal deficit will prevent the
emergence of excess demand in the economy and
thereby help in controlling inflation and achieving price
stability.
Therefore, fiscal deficit has many bad effects and
therefore needs to be controlled. The government has
done a relatively good job at bringing it down but recently
there has been an increase in government spending which
has led to marginal growth of revenue deficit. Although
some experts argue that a little bit of fiscal deficit is
required for the progress of developing countries, the
government has already started taking measures to get it
back in control.