Indian Economy, 5th edition (83 page)

(viii)
Grants
given by the government to Indian states and foreign countries.

Revenue Deficit

If the balance of total revenue receipts and total revenue expenditures turns out to be negative it is known as revenue deficit, a new fiscal terminology used since the fiscal 1997–98 in India.
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This shows that the government’s
Revenue Budget
(see the next topic) is running in losses and the government is earning less revenue and spending more revenues—incurring a deficit. Revenue expenditures are of immediate nature (this has to be done) and since they are consumptive/non-productive they are considered as a kind of expenditure which sums up to a heinous crime in the area of fiscal policy. Governments fulfill the gap/deficit with the money which could have been spent/intvested in productive areas.

A government might have its revenue expenditures less than its revenue receipts, i.e., having (
revenue surplus
) budget. Such fiscal policy is considered good where the government has been able to manage some money out of its revenue budget which could be spent for the creation of productive assets. Yes, another thing that should be kept in mind, as how the government has managed this surplus and whether the policies which made this happen are judicious enough or not. In the Second Plan, India emerged as a revenue-suplus state but experts did not appreciate it as it had many bad impacts on the economy—higher tax rates culminated in tax evasion, corruption, creation of black money, etc.

Revenue deficit may be shown in the quantitative form (as how much the gross/total deficit is in currency terms) or in percentage terms of the GDP for that particular year (shown as percentage of GDP). Usually, it is shown in percentage of the GDP for domestic as well as international analyses.

Effective Revenue Deficit

Effective revenue deficit (ERD) is a new term introduced in the
Union Budget 2011-12
. Conventionally, ‘revenue deficit’ is the difference between revenue receipts and revenue expenditures. Here, revenue expenditures includes all the grants which the Union Government gives to the state governments and the UTs – some of which
create assets
(though these assets are not owned by the GoI but the concerned state governments and the UTs). According to the Finance Ministry (Union Budget 2011-12), such revenue expenditures contribute to the growth in the economy and therefore,
should not be treated as
unproductive
in nature like other items in the revenue expenditures. And on this logic, a new methodology was introduced to capture the ‘effective revenue deficit’, which is the Revenue Deficit ‘excluding’ those revenue expenditures of the GoI which were done in the form of
GoCA
(grants for creation of capital assets).

The GoCA includes the GoI grants forwarded to the States & UTs for the implementation of the centrally sponsored programmes such as Pradhan Mantri Gram Sadak Yojana, Accelerated Irrigation Benefit Programme, Jawaharlal Nehru National Urban Renewal Mission, etc. – these expenses though they are shown by the GoI in its Revenue Expenditures they are involved with
asset creation
and cannot be considered completely ‘unproductive’ like other items put in the basket of the Revenue Expenditures – the reason why a new ‘terminology’ has been created.

As per the
Union Budget 2013-14
,
by the fiscal 2016-17, the Revenue Deficit to be 1.5 per cent and the ‘effective revenue deficit’ to
zero
per cent [it means that by that year the total GoCA forwarded by the GoI will stand at 1.5 per cent of the GDP of the year].

Revenue Budget

The part of the Budget which deals with the income and expenditure of revenue by the government.

This presents the annual financial statement of the total revenue receipts and the total revenue expenditure—if the balance emerges to be positive it is a revenue surplus budget, and if it comes out to be negative, it is a revenue deficit budget.

Capital Budget

The part of the Budget which deals with the receipts and expenditures of the capital by the government. This shows the means by which the capital is managed and the areas where capital is spent.

Capital Receipts

All non-revenue reciepts of a government are known as the capital receipts. Such receipts are for investment purposes and supposed to be spent on plan-development by a government. But the receipts might need their diversion to meet other needs to take care of the rising revenue expenditure of a government as the case had been with India. The capital receipts in India include the following capital kind of accruals to the government—

(i) Loan Recovery

This is one source of the capital receipts. The money the government had lent out in past in India (states, UTs, PSUs, etc.) and abroad their capital comes back to the government when the borrowers repay them as capital receipts. The interests which come to the government on such loans are part of the revenue receipts.

(ii) Borrowings by the Government

This includes all long-term loans raised by the government inside the country (i.e., internal borrowings) and outside the country (i.e., external borrowings). Internal borrowings might include the borrowings from the RBI, Indian banks, financial institutions, etc. Similarly, external borrowings might include the loans from the
w
orld Bank, the IMF, foreign banks, foreign governments, foreign financial institutions, etc.

(iii) Other Receipts by the Governments

This includes many long-term capital accruals to the government through the Provident
f
und (PF), Postal Deposits, various small saving schemes (SSSs) and the government bonds sold to the public (as Indira Vikas Patra,
k
isan Vikas Patra, Market Stabilisation Bond, etc.). Such receipts are nothing but a kind of loan on which the government needs to pay interests on their maturities. But they play a role in capital raising process by the government.

Capital Expenditure

All the areas which get capital from the government are part of the capital expenditure. It includes so many heads in India —

(i) Loan Disbursals by the Government

The loans forwarded by the government might be internal (i.e., to the states, UTs, PSUs, FIs, etc.) or external (i.e., to foreign countries, foreign banks, purchase of foreign Bonds, loans to IMF and WB, etc.).

(ii) Loan Repayments by the Government of the Borrowings Made in the Past

Again loan payments might be internal as well as external. This consists of only the
capital
part of the loan repayment as the element of interest on loans are shown as a part of the
revenue expenditure.

(iii) Plan Expenditure of the Government

This consists of all the expenditures incurred by the government to finance the planned development of India as well as the central government financial supports to the states for their plan requirements.

(iv) Capital Expenditures on Defence by the Government

This consists of all kinds of
capital
expenses to maintain the defence forces, the equipment purchased for them as well as the modernisation expenditures. It should be kept in mind that
defence
is a non-plan expenditure which has capital as well as revenue expenditures element in its maintenance. The revenue part of expenditure in the defence is counted in the revenue expenditures by the government.

(v) General Services

These also need huge capital expenditure by the government—the railways, postal department, water supply, education, rural extension, etc.

(vi) Other Liabilities of the Government

Basically, this includes all the repayment liabilities of the government on the items of the Other Receipts. The level of liabilities depends on the fact as to how much such receipts were made by the governments in the past. How much payment liabilities in which year also depends on the fact as to which years in the past the governments had other receipts and for what duration of maturity periods. As for example, the
PF liabilities
were not an item of such liabilities for almost first three decades after the independence. But once the government employees started retiring, it went on increasing. Future India (specially 1960s and 1970s) saw expansion of the PSUs and excessive employment generation in them (devoid of the logic of labour requirement). We see the PF liabilities expanding like anything throughout the 1990s—the governments had been under pressure to manage this segment either by cutting interest on PF or at present trying to make it a matter of market economy. Same thing happened with the element of
pension
and we have been able to devise a market mechanism for it once pension reforms took place and the arrival of a pension regulatory authority for the area.

Capital Deficit

There is no such term in public finance or in economics as such. But in practice one usually hears the use of the term capital crunch, scarcity of capital in day-to-day economic news items. Basically, the government in the news is facing the problem of managing as much funds, money, capital as is required by it for public expenditure. Such expenditure might be of revenue kind or capital kind. Such difficulties have always been with the developing economies due to their high level requirement of capital expenditures. Had there been a term to show this situation, it would naturally have been
Capital Deficit
.

Fiscal Deficit

When balance of the government’s total receipts (i.e., revenue + capital reeipts) and total expenditures (i.e., revenue + capital expenditures) turns out to be negative, it shows the situation of fiscal deficit, a concept being used since the fiscal 1997–98 in India.
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The situation of fiscal deficit indicates that the government is spending beyond its means.
t
o be more simple, we may say that the government is spending more than its income (though in practice all receipts of the government are not income. Basically, receipts are all forms of money accruing to the government, be it income or borrowings!).

Fiscal deficit may be shown in the quantitative form (i.e., the total currency value of the deficit) or in the percentage form of the GDP for that particular year (percentage of GDP). In general, the percentage form is used for domestic or international (i.e., comparative economics) studies and analyses.

India has been a country of not only regular but higher fiscal deficits. Moreover, the composition of its fiscal deficit has been more prone to criticism (we will see this in the forthcoming sub-title ahead).

Primary Deficit

The fiscal deficit excluding the interest liabilities for a year is the primary deficit, a term India started using since the fiscal 1997–98.
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It shows the fiscal deficit for the year in which the economy had not to fulfill any interest payments on the different loans and liabilities which it is obliged to—shown both in quantitative and percentage of GDP forms.

This is considered a very handy tool in the process of bringing in more transparency in the government’s expenditure pattern. Any two years for example might be compared and so many things can be found out clearly such as, which year the government depended more on loans, the reasons behind higher or lower fiscal deficits, whether the fiscal deficits have gone down due to falling interest liabilities or some other factors, etc.

Monetised Deficit

The part of the fiscal deficit which was provided by the RBI to the government in a particular year is Monetised Deficit, this is a new term adopted since 1997–98 in India.
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This is shown in both the forms—in quantitative as well as a percentage of the GDP for that particular financial year.

It is an innovation in the fiscal management which brings in more transparency in the government’s expenditure behaviour and also in its capabilities concerning its dependence on market borrowings by the RBI. Basically, every year both central and state governments in India had been depending heavily on market borrowings (internal) for its long-term capital requirements. Market borrowings of the government are done and managed by the RBI. Besides, the RBI is also the primary customer for government securities—yet another means of the government to raise long-term capital. This has been a major area of fiscal concern in India. After the process of
fiscal consolidation
was started by the government by the early 1990s, we see a visible improvement in this area. This term is itself arrived as the part of fiscal reforms in India (we will visit the issue of fiscal consolidation in India in the coming pages).

Deficit and Surplus Budget

When the budgetary proposals of a government for a particular year proposes higher expenditures than the receipts, it is known as a
deficit budget.
Opposite to this, if the budget proposes lesser expenditures than the receipts, then it is a
surplus budget.
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In practice, governments the world over usually do not present a surplus budget as it symbolises government’s lower concerns towards development. But at times as a political weapon a government might come out with such a budget (for example the Uttranchal Budget for 2006–07 was a surplus budget!). How can a government propose for a surplus budget in a developing state when even developed countries still need development and are going for deficit budgets? The Union Budget in India had never been presented as a surplus budget.

Deficit Financing

The act/process of financing/supporting a deficit budget by a government is deficit financing. In this process, the government knows well in advance that its total expenditures are going to turn out to be more than its total receipts and enacts/follows such financial policies so that it can sustain the burden of the deficits proposed by it.