What does the term
‘fiscal deficit’ mean?
essence, the fiscal deficit represents the total amount of
borrowed funds required by the government to completely meet its
expenditure. Thus, it is the gap between the government’s
total spending and the sum of its revenue receipts and non-debt
are the GoI’s revenue and capital receipts?
revenue receipts consist of its tax revenues (net of the share
of the states) and non-tax revenues like interest on loans given
to states, dividends and interest paid by public sector firms
etc. its capital receipts consist overwhelmingly of borrowings,
but also include repayments of loan principals by states etc.
and any money raised from disinvestments. The repayments and
disinvestments proceeds are what we referred to as
‘non-debt’ capital receipts above.
is the significance of the fiscal deficit?
As with any household
budget, the extent of the fiscal deficit tells us how much the
exchequer is living beyond its means. A large fiscal deficit,
therefore, implies a large volume of borrowings which would,
obviously, create a corresponding burden of interest payments
for the future. Further, a large fiscal deficit also has the
more immediate impact of fueling inflationary pressures. It
therefore effectively imposes an ‘inflation tax’.
the GoI’s method of measuring the fiscal deficit the universal
No. In fact, from a
economic perspective, a more meaningful measure of the fiscal
deficit would include the borrowings of the entire government
itself, but also the public sector. It is worth mentioning here
that it is not just the fiscal deficit of the central government
that matters, but the combined fiscal deficit of centre, states
and local governments, which gives a more realistic picture of
the extent to which all levels of government are mortgaging the
future to meet current spending.
is the revenue deficit referred to in the budget documents?
This is the gap between
revenue receipts and revenue expenditure. We’ve already seen
what revenue receipts are. Revenue expenditure may be described
as current expenses as distinct from investments, which are
To use a household
analogy, payments for electricity, the maid, the grocery bills
would be revenue expenditure, whereas money spent on adding a
room would constitute capital expenditure.
Thus, the revenue
deficit tells us how big the gap is between the government’s
current expenses and its current income stream. The bulk of the
centre’s revenue expenditure today is on interest payments and
wages for its own staff and defence personnel.
the significance of the revenue deficit different from that of
the fiscal deficit?
Indeed it is. While the
fiscal deficit tells us how much the government has to borrow,
the revenue deficit gives us a better fix on what it needs to
To return to the
household analogy, the revenue deficit tells us whether the
owner is borrowing to pay the grocer or is doing so to add a
room. Given the same level of the fiscal deficit, therefore, a
higher revenue deficit is worse news than a lower one.
In fact, some economists
argue that for this reason the revenue deficit is a more
important indicator that the fiscal deficit.
is the primary deficit and what does it signify?
The primary deficit is
simply the fiscal minus the interest payments. What it tells us,
therefore, is how much of the government’s borrowings are
going towards meeting expenses other than interest payments. The
idea of this parameter is to see how much the government is
borrowing thanks to the sins of the past (which commit it to
interest payments) and how much it its borrowing as a
continuance of its profligate ways.
Thus, a low or zero
primary deficit would suggest that while its interest
commitments on earlier loans have compelled the government to
borrow, it is alive to the need to tighten its belt. A high
primary deficit would suggest the converse.
are the relevant figures for the GoI?
Since budget estimates
are notoriously unreliable, let’s consider the revised
estimates for ’99-00. The fiscal deficit was at 5.6 percent of
gross domestic product (GDP), the revenue deficit at 3.8 percent
and the primary deficit at 0.9 percent of GDP was at its highest
since ’93-94. Thus, the GoI has not only borrowed heavily and
for the wrong purposes, but it continues to do so.