Indian Economy- Budget & Fiscal Deficit

Budget & Fiscal Deficit

17.1 Budget

Budget is the statement of estimates of the Government receipts and Government expenditure for the forthcoming financial year. A government budget is a financial plan concerning outlay and receipts of the government. Budget helps execution of future activities in preplanned way.

a.Budget Receipts

Budget receipts refer to estimated money receipts of the govt. from all sources during the financial year.

The budget receipts are further classified into two parts --- Revenue Receipts and Capital Receipts.

i.      Revenue Receipts: Revenue receipts consists of following items:

A.    Tax Receipts:-

(a)   Wealth Tax

(b)   Income Tax

(c)   Corporation Tax

(d)   Excise Duty

(e)   Customs Duty

(f)    Gift Tax

B.    Non – Tax Revenue Receipts:-

Non tax revenue receipts include receipts from sources other than taxes, like

(a)   Fees

(b)   License and Permit

(c)   Fines and Penalties

(d)   Special Assessment

(e)   Income from Public Enterprises

(f)    Gift and Grants

ii.    Capital Receipts: Capital receipts are those monetary receipts which either generate liability for the government or decrease the assets of the government. Capital receipts of the government budget are further classified as:

(a)   Recovery of loans

(b)   Borrowing and other Liabilities

b.Budget Expenditure

Estimated expenditure of the government on its ‘development’ and ‘non-development’ programmes, or on its ‘plan and non-plan programmes; during the concerned financial year is termed as Budget expenditure.

Segregation of Budget expenditure of the government:

i.      Revenue Expenditure

ii.    Capital Expenditure

iii.   Other Public Expenditure.

Revenue expenditure:

-         These expenditures do not create assets for the government

-         These expenditure don’t cause any reduction of liability of the government

Capital expenditure:

-         This expenditure creates assets for the government

-         Capital Expenditure may cause decrease in liabilities of the government

Other public expenditure

-         Development Expenditure

-         Non-Development Expenditure

-         Plan Expenditure

-         Non-plan Expenditure

-         Transfer Expenditures

-         Non-Transfer Expenditure

17.2 Budget Deficit

Budget Deficit means a situation when Budget Expenditure of the government is more than the Budget Receipts. In other words, budget deficit means excess of total expenditure (revenue expenditure and capital expenditure) over and above the total receipts (revenue receipts and capital receipts) of the government.

Budget Deficit = (Budget Expenditure or Total Expenditure) –(Budget Revenue or Total Revenue).

-         Balanced budget : When budget revenue equal expenditure it is termed as balanced budget. [Q:36]

-         Deficit budget : When the economy is experiencing deflation, Deficit budget should be prepared by the government.

-         Capital Deficit : If Borrowings and Other Liabilities are added to the Budget Deficit, we get Capital Deficit.

-         Surplus Budget : Surplus Budget should be prepared to curb an inflationary situation in the economy.

a.FRBM Act : Fiscal Responsibility and Budget Management (FRBM) Bill was introduced in 2000. FRBM Act aims to reduce gross fiscal deficit by 5%.

b.Budget Deficit

According to the budget of the Government of India, there are three important types of budget deficit:

-         Revenue Deficit

-         Fiscal deficit

-         Primary deficit

i.      Revenue Deficit: Revenue deficit may be defined as a situation where revenue expenditure exceeds revenue incomes.

Revenue Deficit = Revenue Expenditure – Revenue Receipts

In the case of high revenue deficit, govt. is left with no options than either to cut its expenditure, or increase its tax or non-tax receipts. But, in case of less developed and poor countries, government is compelled to cope with high revenue deficit by way of borrowing and disinvestment. A well planned process is needed to strike a balance between assets and liabilities. Otherwise, the whole financial system of the economy may get destabilized.

ii.    Fiscal Deficit: Fiscal deficit implies the excess of total expenditure (Revenue + Capital) over total receipts (Revenue & Capital Receipts other than borrowing).

Fiscal Deficit = Budget Expenditure (Revenue Expenditure + Capital Expenditure) – (Budget Receipts other than borrowing i.e. Revenue Receipts + Capital Receipts other than borrowings)

Fiscal deficit is the total borrowings and other liabilities of the government. Fiscal deficit is estimated to know about the extent of borrowings required by the government. Higher fiscal deficit depicts higher amount of borrowing by the government. It may lead to inflation, increase foreign dependence and accumulate financial burden for future generation.

iii.   Primary Deficit: Primary Deficit is the difference between fiscal deficit and interest payment. It is estimated as under:

Primary Deficit = Fiscal Deficit − Interest Payment.

c.Deficit financing:

-         If public expenditure exceeds public revenue, then it is called deficit financing.

-         Deficit financing is most important sources of plan finance to cover up gap between intended expenditure and available resource.

-         Deficit may be financed by government through borrowing from the commercial banks borrowing from RBI and  issue of new currency.

-         Deficit financing includes borrowing from the central bank, issue of the currency by the government & withdrawal of past accumulated cash balance by the government.

17.4 Importance of Budget

Budget plays a great role in financial and economic management of the economy. Budget gives detailed understanding of the size and sources of government revenue, and details of the government expenditure. Detailed study of the government expenditure shows direct and indirect participation of the government in development and, welfare programmes of the country. Government participates indirectly with expenditure on irrigation projects, roads, dams, bridges, power etc. Budget also shows the extent of privatization, liberalization and globalization of development efforts of government. This is the summary statement of the fiscal policy of the government. Government performance can be measured by comparing actual expenditure and receipts with budget figures.

Government Borrowing : Government Borrowing refers to Borrowing from the market by way of 91 days Treasury Bills & Raising funds from public through National Savings Schemes, Post Office saving Deposits, Provident Fund Collections, etc.

Zero base budgeting : Zero base budgeting system is a budgeting technique in which budget is prepared without consulting any previous budget. It is a system of a fresh budget preparation from the root.