ICAI Notes 6.6 - Budget and Fiscal Deficits in India | Business Economics for CA Foundation PDF Download

Learning Objectives

• understand the meaning of budget deficit and fiscal deficit.
• know how budget and fiscal deficits have progressed over the years.

6.0 MEANING OF BUDGET AND FISCAL DEFICITS

The Government of India, every year prepares budget which shows the expected receipts and expenditures of the government in the coming financial year. Receipts of the government come from taxes (both direct and indirect), profits from various financial institutions, government commercial undertakings, interest from loans given to other governments, local bodies, etc. and expenditure of the government are on developmental projects such as construction of roads, railways, production of energy and non-developmental expenditure on a large number of activities such as defence, subsidies, police, law and order, etc. If receipts are equal to expenditure, the budget is said to be balanced one. If receipts are higher than the expenditure, the budget is said to be surplus one and if receipts are lower than the expenditure, the budget is said to be deficit one.

Budget deficit is thus the difference between total receipts and total expenditure (revenue plus capital). If borrowings and other liabilities are added to the budget deficit, we get fiscal deficit. Fiscal deficit, thus measures that part of government expenditure which is financed by borrowings. Consider the following example to understand both the concepts: 

Calculation of Budget Deficit and Fiscal Deficit

Budget deficit is Total receipt – Total expenditure
So here,
For 1990-91, Rs. 93,960 crore – Rs. 1,05,310 crore = Rs. 11,350 crore
For 2004-05, Rs. 5,14,344 crore – Rs. 5,14,344 crore = Nil
Fiscal deficit is
(a) the difference between total expenditure and total revenue receipts and capital receipts but excluding borrowings and other liabilities. or
(b) it is the sum of budget deficit plus borrowings and other liabilities.
So here, for 1990-91, Fiscal deficit is
1st Method:
Total expenditure = Rs. 1,05,310 crore
(-) Total revenue receipts (no.1) = Rs. 54,950 crore
(-) Capital receipts [no.2(a)] = Rs. 5,710 crore
Or Rs. 1,05,310 crore – Rs. 60,660 crore
Or Rs. 44,650 crore

2nd Method:
Budget deficit (item 7) + borrowings and other liabilities (item 2(b))
= Rs. (11,350 + 33,300) crore
= Rs. 44,650 crore
For 2004-05, Fiscal deficit is
1st Method = Rs. 5,14,344 crore – Rs. [3,51,200 + 12,000] crore
= Rs. 1,51,144 crore.
2nd Method = Nil + Rs. 1,51,144 crore
= Rs. 1,51,144 crore

6.1 TRENDS IN INDIA’S BUDGET AND FISCAL DEFICITS

Budgetary deficit which shows the difference between total revenue and total expenditure does not give a true picture of the financial health of the economy. It treats government borrowing from the market or raising the funds from the public such as national savings schemes, post office saving deposits, provident fund collections etc. as receipts. Originally, budget deficit was calculated to show RBI lending to the government. In 1997, the practice of RBI lending to government through ad hoc Treasury Bills was given up. Thus the concept lost its relevance and now it is no longer shown in the budgetary statement. The government now taps 91 days treasury bills from the market and shows it as part of the capital receipts under the heading “borrowings and other liabilities”.

Fiscal deficit is a more comprehensive measure of the imbalances. It focuses on/measures the total resource gap and as such fully reflects the impact of the fiscal operations of the indebtedness of government. It is the measure of excess expenditure over the government’s own income.

Fiscal deficit in India have grown rapidly. In the fifteen year period of 1975-90, the fiscal deficit of the Central Government rose alarmingly from 4.1 per cent of GDP to 7.9 per cent of GDP. The then present fiscal malaise had been caused by unchecked growth of non planned revenue expenditure. Non plan revenue expenditure particularly on defense, interest payments and food and fertiliser subsidies rose sharply during 1980s. In 1991, major steps were taken to correct the fiscal imbalances. Many expenditures were cut and controlled (e.g. subsidies). Fiscal deficit was reduced to 4.7 per cent in 1991-92 and to 4.1 per cent in 1996-97. Since 1997-98, fiscal deficit has again started increasing. It stood at 5.6 per cent in 2000-01. To restore fiscal discipline, the Fiscal Responsibility and Budget Management (FRBM) Bill was introduced in 2000 and FRBM Act was passed in 2003. The Act aims at reducing gross fiscal deficit by 0.5 per cent of the GDP in each financial year (beginning on April 1, 2000). As a result of the efforts taken, the fiscal deficit as a proportion of GDP has started declining. During 2003-04, it was 4.5 per cent, during 2004-05 and 2005-06 it was 4.1 per cent, during 2006-07 and 2007-08 it was 3.5 per cent and 2.7 per cent respectively.

World wide financial crisis affected Indian economy also. The extraordinary situation that emerged due to crisis had led to a sharp shrinkage in the demand for exports. Domestic demand also shrank leading to a downturn in industry and services sectors. The situation demanded a fiscal response. The measures taken included increase in the plan expenditure, reduction in indirect taxes, sector specific measures for textiles, housing, infrastructure, automobiles, micro and small sectors and exports etc. These, together with debt relief package for farmers and outlay due to Sixth Pay Commission recommendations led to an upsurge in the fiscal deficit to 6.2% of GDP compared with 2.7% for 2007-08.

SUMMARY 

Budget deficit is the difference between total receipts and total expenditure. If borrowings and other liabilities are added to budget deficit, we get fiscal deficits. Since budget deficit does not show the true picture of government liabilities and hence a true picture of the financial health of the economy, the practice of showing budget deficit in the budget was given up in 1997. Budgets now show fiscal deficits to show the overall shortfalls in the public revenues. Over the years, fiscal deficits have grown rapidly and have become the cause of concern. To meet the challenge, many reforms have been carried out but still the problem of high fiscal deficit remains.