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21 TYPES OF DEFICITS: घाटे के प्रकार

- If government’s income >> its expenditure it will have a surplus budget/ अधधशेष बजट
- If government’s expenditure == its income, it will be a balanced budget/ संतभु लत बजट
- If government’s expenditure >> its income, it’ll be a deficit budget/ घाटे का बजट

Deficit Formula Interim-2019 (₹ lakh cr)

Revenue Deficit Revenue expenditure – Revenue 4.70 lcr. (2.2% of GDP)

राजस्ि घाटा receipts

Effective Revenue Deficit Revenue Deficit minus Grants for 2.70 lcr. (1.3% of GDP)
प्रभािी राजस्ि घाटा creation of capital assets

Budget Deficit Budget expenditure minus Budget 00

बजट घाटा receipt

Fiscal Deficit Budget Deficit 7.00 lcr. ( _ _ _ of GDP)

राजकोषीय घाटा

Primary Deficit Fiscal Deficit minus 39000 cr. (0.2% of GDP)

प्रार्ममक घाटा
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MCQ. Find Correct Statement(s) (Asked in UPSC-Pre-2017)

1. Tax revenue as a percent of GDP of India has steadily increased in the last decade.
2. Fiscal deficit as a percent of GDP of India has steadily increased in the last decade.
Codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither I nor 2

21.1 FISCAL DEFICIT: राजकोषीय घाटा

- Fiscal Deficit= Budget Deficit + Borrowing. This borrowing includes borrowing at
home (such as through Small Savings Scheme, and the G-Secs subscribed by
Banks/NBFCs) + Borrowing from RBI + Borrowing from abroad.
- Alternatively, we can expand formula as Fiscal Deficit = Total expenditure – (Revenue
receipts + Non-debt capital receipts).

21.2 PRIMARY DEFICIT: प्रार्ममकघाटा

- If the government continues to borrow year after year, it leads to accumulation of
debt and the government has to pay more and more interest. These interest
payments themselves contribute to borrowing requirements next year.
- So, to get a clearer picture of how much is the government borrowing for new
programs, they look at another indicator:
- Primary Deficit = Fiscal deficit minus the interest to be paid on the previous loans.

21.3 FINANCING THE DEFICIT AND ITS NEGATIVE CONSEQUENCES ON ECONOMY:

घाटे का वििपोषण: अर्थव्यिसर्ा पे उसके नकारात्पमक पररणाम
Deficit can be financed by either taxation, borrowing or printing money.
- Taxes can’t be increased beyond a point because it may force people to evade taxes /
discourage their motivation to work. (recall Laffer Curve).
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- High deficit → Government borrows more money → @Maturity of G-Sec, it will have to
return the principal and interest to the lenders. At that time, Govt may greatly increase
taxes on people to arrange that amount. So, Economist David Ricardo argued that during
high deficits, people save more, because they become precautious about future hike in
taxes. It’s called “Ricardian equivalence: ररकार्डथयन तल्
ु यता” [& if people begin to spend
less and save more, then companies will face unsold inventories, creating new set of
problems]
- If government borrows more money from households & financial intermediaries (LIC,
EPFO, Banks via SLR), then that much less money will be available for loans to private
corporate borrowers. = “ _ _ _ _ _ _ _ _ _ _ _ _ : हासकारी प्रभाि” on the private borrowers=
harms factory expansion and job creation.
- If Government forces SBI, LIC, EPFO to buy its G-sec using public deposits and thereby
depriving households of the optimal return (Had the same money been invested in the
corporate sector) = “ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ of the households: घरों/ कुटुम्बों का
वित्तीय दमन”.
- High level of fiscal deficit → International credit rating Agencies will reduce the
sovereign rating → investors will demand more interest from government for buying new
G-Sec→ G-sec remains unsold → RBI forced to buy it (and print more money to give to
Govt) → it’s called “ _ _ _ _ _ _ _ _ _ _ _ _ : मद्र
ु ीकृत घाटा”. It can result in hyperinflation
and reduce the purchasing power of currency (if there is not sufficient increase in the
supply of onion, tomatoes & goods in the market.) e.g. Germany, after Treaty of
Versailles (1919).

21.4 FISCAL CONSOLIDATION / PRUDENCE: राजकोषीय एकत्रीकरण / वििेक

It involves reduction in government expenditure to control its Fiscal Deficit. Such as
1. Reducing the scope of leakages by targeted delivery of schemes and subsidies
through direct benefit transfer (DBT) through JanDha- Aadha- Mobile (JAM) trinity.
2. Reducing the quantum of subsidies: e.g.
a. Deregulation of Petrol prices (2010), Diesel Prices (2013).
b. 2016: Oil Ministry began to block LPG-Pahal subsidies to persons with annual
taxable income of ₹ 10 lakh />
c. 2017: Oil Ministry asked oil companies to keep raising prices of subsidised
kerosene by 25 paise every fortnight until the subsidy is eliminated.
3. Shutting down loss making PSU. E.g. Hindustan Photo Films, HMT Bearings, HMT
Chinar Watches, Tungbhadra Steel, Hindustan Cable & HMT Watches (2014).
4. Privatization of loss making PSU/PSBs e.g. 2018- IDBI2LIC, 2018- Tried to sell off Air
India, but unable to find any buyer.
5. Austerity Measures:भमतव्यनयता के उपाय e.g. 2018- W.Bengal govt issued directives to
its departments banning flower bouquets and mementoes in public functions,
banning officials meetings at private hotels, frequent installation of AC, car purchases,
office renovations etc. & restricting the number of foreign tours by Ministers / IAS
etc., More use of video-conferencing instead of personal tours.
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MCQ. There has been a persistent deficit budget year after year. What can be done by
by the government to reduce the deficit? (Asked in UPSC-Pre-2015)
1) Reducing revenue expenditure 2) Introducing new welfare schemes
3) Rationalizing subsidies 4) Expanding industries
Answer Codes: (a) 1 and 3 only (b) 2 and 3 only (c) 1 only (d) 1, 2, 3 and 4

MCQ. In India, the price of petroleum products has been deregulated mainly to (UPSC-
CDS-2013-II)
(a) reduce the burden of subsidies given to the oil companies
(b) discourage the exploration of oil reserves in the country
(c) discourage the demand for private vehicles
(d) curb the use of black money in the economy

21.5 FISCAL STIMULUS (राजस्ि प्रोत्साहन पेकेज)

- When government reduces taxes and/or increases public procurement (सरकारी खरीद)
to boost the demand & growth in economy, it’s called “Fiscal Stimulus”.
- Post-subprime crisis in USA, Manmohan Govt. announced Fiscal Stimulus (2008)
such as (1) Cut in the Excise duty & Custom Duty on exports (2) Businessman where
given additional depreciation benefits in Income Tax & Corporation Tax, if they
purchased new commercial vehicles. (3) Hiked the MSP procurement prices for
farmers.
- However, the economic surveys observed that such Fiscal Stimulus create new set of
problems by increasing the fiscal deficit in the subsequent years.
MCQ. Which one of the following statements appropriately describes the “fiscal
stimulus”? (Asked in UPSC-Pre-2011)
(a) It is a massive investment by the Government in manufacturing sector to ensure the
supply of goods to meet the demand surge caused by rapid economic growth
(b) It is an intense affirmative action of the Government to boost economic activity in the
country
(c) It is Government’s intensive action on financial institutions to ensure disbursement of
loans to agriculture and allied sectors to promote greater food production and contain food
inflation
(d) It is an extreme affirmative action by the Government to pursue its policy of financial,
inclusion

21.6 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ , 2003 (FRBM)

राजकोषीय उिरदानयत्पि और बजट प्रबंधन अधधननयम, 2003
Originally it required Union and States to control their deficits with following targets:.
- By 2008: Reduce Fiscal Deficit to 3% of GDP (for Union) and 3% of GSDP (for
States).
- By 2008: Eliminate Revenue deficit (=make it 0%) of their respective GDP or GSDP.
While some of the state governments were able to do it, but successive union government
struggled to meet these targets so they kept amending the act to extend the deadlines and
targets. E.g. Amendment 2012: No need to have 0% Revenue deficit. Instead it required 0%
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Effective Revenue Deficit by 2015. These deadlines were extended even further in
subsequent Finance Bills.

21.6.1 FRBM Review Panel under _ _ _ _ _ _ _ _ (2016-17); समीक्षा पैनल

- Budget-2016: Jaitley felt FRBM Act targets were too rigid and did not allow any room
for the government to address any crisis e.g. farm loan waivers during drought period
or unemployment allowance during global financial crisis are not possible if
government strictly wants to control fiscal deficit at 3% of GDP.
- So, he constituted a panel under NK Singh (former IAS, 15th FC chairman) to review
the FRBM act. RBI Governor Urjit R. Patel & CEA Arvind Subramanian were also in
the committee.

21.6.2 FRBM Panel’s Notable recommendations: उल्लेखनीय मसफाररशें?

- Replace the existing FRBM act with a new act, with an ‘ _ _ _ _ _ _ _ _ _ _ _ _ ’ i.e.
During a war, drought or economic crisis, the government should be temporarily
allowed to cross breach targets.
- Set Up an independent Fiscal Council for monitoring.
- Adopt following fiscal road map for the union from 2017 to 2023 gradually reduce
Union Debt to GDP (to less than 40%), Fiscal Deficit (to 2.5%) and Revenue Deficit (to
0.8%)
So, citing NK Singh report (as an excuse), Budget 2018 amended the FRBM targets →

Indicator (Actual) (Actual) (TARGET) (TARGET)

as % of GDP 2018-19 2019-20 2020-21 2024-25

Fiscal Deficit 3.4% 3.4% ____% 3.0%

Primary Deficit 0.2% 0.2% ____% 0.0%

Revenue Deficit & ERD These targets are abandoned in FRBM

Union Debt: GDP In 2017, it’s ~46.5%, Gradually reduce it ____%

to →

General (=Union+State) Gradually reduce to → ____%

Debt to GDP:
FRBM Act requires the union government to present 3 documents along with the budget:
1. Fiscal Policy Strategy Statement (राजकोषीय नीनत कायथनीनत वििरण): To explain how Govt.
is controlling the deficits, and whether there is going to be any deviation from the target.
2. Macroeconomic Framework Statement (व्यापक आर्र्थक ढााँचा वििरण): to show economic
data - GDP, growth rate, import-exports, and government’s receipts and expenditure etc.
3. Medium-term Fiscal Policy Statement (मध्यम अिर्ध की राजकोषीय नीनत वििरण): for next
3 year projections
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(Concept) Fiscal Slippage: If government has targeted to keep the fiscal deficit within 3.4%
percent of GDP, but if it crosses that limit, it’s called ‘Fiscal Slippage’.
MCQ. According FRBM Act, the Government is under obligation to present three
statements before the parliament along with the Annual Budget. Which one of the
following is not one of them? [UPSC-CDS-2008-I]
(a) Macroeconomic Framework Statement
(b) Fiscal Policy Strategy Statement
(c) Medium-term Fiscal Policy Statement
(d) Statement showing Short term Fiscal Policy

21.6.3 Public Debt Management Agency (PDMA): सािथजननक ऋण प्रबांधन एजेंसी

- RBI decides on the repo rate and also undertakes open market operation for buying and
selling of G-sec. Most of the G-sec are purchased by public sector banks, insurance and
pension funds. As Banking-regulator, the Reserve Bank is able to nudge PSBs to
subscribe to G-sec. So, this creates a ‘conflict of interest’ for RBI in its role as Banking
regulator vs Public Debt manager.
- Budget-2015 proposed creating an independence Public Debt Management Agency
(PDMA) to takeover these functions of RBI. But later plan was put on a back burner due
to RBI’s objections.
- 2019: NITI Aayog Vice Chairman Rajiv Kumar again reiterated the need to setup PDMA.