BUDGET AND THE

ECONOMY

■ Concept of Government Budget

■ Objectives of Government Budget

■ Structure (or Components) of the Budget

■ Budget Receipts-Revenue Receipts
-Capital Receipts
■ Budget Expenditure-Revenue Expenditure
-Capital Expenditure
■ Budget Deficit-Revenue Deficit
-Fiscal Deficit
-Primary Deficit
■ Balanced and Unbalanced Budget

---~ft~
1. COt\JCEPT OF GOVERNMENT BUDGET
Febr~a_ry-1 is a well known date in India when the Finance Minister
presents annuat budget of the government for its approval by the
parliament. The budget unfolds:
t e fmanc al performance of the government over the
year, and
8 one

the f nanc,al programmes and policies of the government for the

next one year
As regards financi al performance of the government, it is more like a
description of what happened during the past one year. Focus is placed
 \. r cly on the otlH r p 11 t of the budget dcsrribing programme~ anrJ
pollc.1cs of the gow1 nnwnt for the next one ye,ir.
The programmes and pol1c1es of the government (,t<; presented 1n th
budget) a1 e known us Budgetary Policy' of th<' government, or 'Fr c e
p l y of the government It has two aspects· (1) rPvenue aspect, and
(11) expenditure aspect. On the revenue side, the budgetary policy revedls
expected I eceipts of the government On the expenditure side, 1t reveals
expected expenditure of the government.
It rs by managing the budgetary revenue and budgetary expenditure that
the government tries to achieve 'growth with stability'.
Thus, government budget is a statement of expected receipts and
expected expenditure of the government (for the financi al yea r to corne)
that reveals budgetary policy of t he government to achi eve the twin
objective of growth with stability.

I Government budget is a statement of expected receipts and expected expenditure of the government
for tlie financial year to come) that reveals budgeta ry policy of the government to achieve the. twin
objective of growth with stability.

c/r'
2. OBJECTIVES OF GOVERNMENT BUDGET
Follow ing is a brief description of some pri ncipa l objectives of
government budget (with special reference to t he Indian economy):
(1) GDP Growth: GDP growth is the central objective of government
budgetary policy. It is achieved in two ways: (i) by making public
investment expenditure, and (ii) by inducing private investment
expenditure (through tax rebates and subsidies).
(2) Allocation of Resources: Private enterprises will always desire to
allocate resou rces to those areas of production where profits are
high. However, it is possible that such areas of production (like
production of alcohol) may not promote social welfare. Through its
budgetary policy, the government of a country directs the allocation
of resources in a manner such that there 1s a hala.n.c.e. b.e.tween the
goals of profit maximisation and social welfare. Production of
goods which are injurious to health (like Cigarettes and Whisky) is
discouraged through heavy taxation. On the other hand, production
of 'socially useful goods' (like, 'Khadi ') is encouraged through
subsidies.

(3) Provision of Public Goods: Supply and demand forces in a market

economy do not allow enough production of public goods, These
are those goods which satisfy collective needs of the people)

,. 316
 Law & 01 cter.and t efence of the country are important examples of
~ goods. It is t'l"ough budgetar) allocation of funds that these
~oods a e st..mcentl) p ·oviided to the people.
:,
(4) ~istribution of Income imd Wealth: Budget of the government
sho .vs ts comp"ehens;ve exercise on the taxation and subs1d1es.
1
,he government uses f sec1l instruments of taxation and subsidies
with a v:ev. to 'mproving the distribution of incom e and wealth in
the econo'll\...E
_qu1table d .st. 1but,on of ,ncome and wealth 1s a sign
of soc,aq_us~ ·ce .. h:cn s tht= pr:ncipal object:ve oi any welfa·e state
as in India o·stri bution of incom e and wealth is improved in two
ways:
(i) By imposing taxes on rich and giving subsidies to the poor, and
CTO By supplying food grains to BPL population at a low price.
Example: Free distribution of LPG connection to the poor ~
'P~
p
~
-)
.._,,
people.
(S)~nced Regional Growth: The budgetary policy places priority on
the development of backward regions in the country. This is achieved
througr Lberal tax laws for the backward regions. Establishment of
SEZ fspec: al economic zones) in the backward regions through
Liber'a ~ax .aws may be citt=d as an example.
(6} Employment Opportunitit:!S: Budgetary policy focuses on the
generation of employment opportunities through investment in
public enterprises. Budgetary provisions are made for schemes
like MGNREGA offering E!mployment to poorer sections of the
society.
(7} Economic Stability: Free play of market forces (or the forces of
supply and demand) are bound to generate trade cycles, also called
business cycles. These refer to the phases of recession, depression,
recovery and boom in the economy. The government of a country
is always committed to s<,ve the economy from business cycles.
Budget is used as an important policy instrument to correct the
situations of deflation and inflation. By doing 1t, the government
tries to achieve the state e1f econom ic stability. f rnnom1c stability
st
imulates the inducement to invest and increases the rate of
growth and development.
Briefly th . .
· e govern ment tries to manage its revenue and expenditure 111
such a Way that the GDP growth l's accelerated, inflationary & deflationary
Pressures l. . b"l"
to th are e 1m1nated, and in1equality is reduced. This imparts sta 1 1ty
e process of growth.
~
r;{~~-
 3. STRUCTU REOF THEBUDGET
OR
COMPONENTS OF THE BUDGET
Structure of the budget refers to the components of budget Tw b
· 0 road
components of the government budget are:
(i) Budget Receipts (including revenue receipts and capital receipts),
and
(ii) R
11
'1get Expenditure (including revenue expenditure and capital
expenditure).
Details of both these components are discussed as under:
Budget Receipts
Budget receipts refer to estimated money receipts of the government
'rem all sources during the fiscal yea r.
Broadly, the budget receipts are classified as:
(1) Revenue Receipts, and
(2) Capital Receipts.
Following are the details:
(1) Revenue Receipts
Revenue receipts are those money receipts of the government which
show the following two characteristics:
(1') Thesf' rere1pts do nut create any corresponding l1 11 for the
.ab'l'ty ·pt
. . e rece1.,.
Example: Tax receipts. Tax 1s a revenu
.because .1t does not involve any correspo nding l1a . bltY tor t,..-
1 1
paym11
government. Trlx is a unilateral (or one-sided) compulsory
to the government.
..1) r hese reu •pts do not cauc;e any redu ction ·in as sets 0
(1 1
governrient. Example: Tax receipts do not lead to any red
318
...........-
Government Budget and The
Economy
. assets of the gov ern me
in nt. In con tras t, if gov ern
. h me nt receives
rnoney by sell ing its s are o f som e com pan y
(say Air India), it causes
reduction in assets of the ~ov ern me nt. These are
be treated as rev enu e rec the refo re, not to
eip ts.
revenue rec eip ts of the
1nshor,t gov ern me nt are tho se mo ney rec eip ts
. d not cre ate a l1ab .
1
·t f h
whic h O 1ty or t e gov ern me nt and as we
•
ucti on in assets of the gov ll do not
lead to red ern me nt.
~
Q. Is borrowing by the gov
ernment a revenue receipt?
Ans. No. because it creates a
liab ility (for the governmen
t) of repayment.
Revenue receipts are bro adl
y clas sifi ed as tax receipts and
non -tax receipts.
Constitue nts of Rev enu e Rec
eipts
■
Tax Receipts } Non-tax Receipts
Income Tax
Corporation Tax }
l ... Fees I I Fines
l I-
t
:state Duty
Gift Tax
I
Escheat
II Special
Assessment I ,
Customs Duty \ Inc om e from ' Income from the
Public
Enterprises Sale of Spectrum
like 2G and 3G
Excise Duty
GST (Goods and
I Grants/
Donations
_Ser ✓1ces Tax)
Tax Receipts
At
. ax ·is a com pul sor y pay
me nt to the gov ern me
nt by the hou s_eho lds,
'·-"l's or o+her ins tit 11 ti ora ' uni ts
·Th e tax pay er can not exp
orb ene t·it fram the e ct any ser vice
gov ern me nt, in retu rn.
I Atax is a compulsory pay men
reference to anything in retu
t mad e by an indi vidu al, hou
rn.
sehold or a firm to the gov
ernment
Types of Taxes
Taxes a b
re roa dly clas sifie d as:
(i) Progressive and Reg res
sive Taxes,
 (ii) \ alur Added and Specific Taxes, and
(i ii) Direct anci Indirect Taxes.
(i) Progr,essive and Regressive Taxes
r oc arP cla!">sified as p1 og1essive' an d 'regressive' d
a,,-" . . . ependi
real bu rden of ta'<atIon. Detai ls aI e as under: ng ,
0
(a) Progressive Tax: A tax is said to be progressive Wh
. ..,,, .''"C''"'"'7'"'"' .•• , .inc0rn,.,. So that then t
tax 111, ....... -.r,...c: \\"•"
of the tax 1s more on the rich . and less on the Poor , eErea1 bJri
1
.
rate is 10°10 for income · Xa~Plt:
between~ 2 tot 5 lakh. It is lS% f .
between~ 5 to~ 10 lakh, and so on. Thus, tax rate incre0 or rn,
.
level of income .increases. ases as
(b) RegressiveTax: A tax Issaid to be regres-\ w1...,--~ :.. usesa r
1
~,, , ... ~-- 01 the ·oo· t~a- the ·'c' If a person with t ~IIQ
as his monthly income pays 10% income tax (or pays t 10,000·
still has a balance of~ 90,000 per month. But if a person with tS,OOJ
as his monthly income has to pay 10% income tax (or pays~ 500 1
it might mean a cut in his essential consumption leading to~
diet and therefore, poor health. Thus, a constant rate of taxation
the rich and the poor is a regressi ve tax, as it causes a greaterreat
burden on the poor than the ric h.
(ii) Value Added Tax or VAT and Specific Taxes
Depending upon tax base, taxes can be classified as:
(a) Value Added Tax or VAT Value added tax is an indirect tax w_
is imposed on 'Value AuuL, at the various stages of praciuctJCIIL
Value added refers to the difference between value of output
value of intermediate consumption. It is imposed at each Slagt
production. GST is an important form of value added tax.
(b)
. . Tax: When a tax is levied on a corn mo d'Ity on the basis
Spectf1c
units, size or weigh t, it is called the specific tax.
t and Indirect Tax
axes are classified as direc t and indirect orH~narnl:J Cl
burden.
(a) Direct Tax: A direct tax is the one the final burden of w
by the person on whom it is imposed. For examp
320

is imposed on the i ncome of a person and he

burden. The burde n of tax cannot be shifted
ii
~
vt>rnment Budqet and The Economy
income 7 S
tax, corpora tion tax, gift tax, w0nlt h tax, are examples of
i t~
direct tax. U \ )
- d' g to Prof. Dalton, "A di1 ect tax is really pain by the person on
Certain taxes are called
'paper taxes'. These refer
I Accor in . d" to the tax.es like gift tax
. •, legally impose . in India which carry their
whon1' 1 is .
significance only on
. ct Tax·. An indirect tax is the one whose initial burden or impact paper. These taxes are of
b) In d,re little or no significance
( 1s on one person but he succeeds in shifting the burden to another in terms of their revenue
persons. GST is an _i mportant example. It is levied on the producers. yield.
They are to pay this tax to the government. But they charge this tax
trom the buyers by adding it to the price of the goods sold.
I Accordin~g to Prof. Dalton, "An indirect tax is imposed on one person but paid partly or wholly by
another.
Direct Tax and Indirect Tax-The Difference
Direct Tax Indirect Tax
(i) It is the tax which is finally paid by (i) It is the tax which is imposed on
the person on whom it is legally one person but is paid by another.
imposed.
~ii) The burden of direct taxes cannot ./!)f The burden of indirect taxes can
f) be shifted to other person. · be shifted to others.
Oii) Direct taxes are generally (iii) Indirect taxes are generally
progressive in nature. regressive in nature.
Examples: Income tax, corporate Examples: GST, customs duty.
profit tax.
-
. '• t-<;;:s. ·-.
Q. Expla~n:through an example, how the burden of an indirect tax is shifted.
Ans. GSTis :a:ritJ_ij{faect tax. A shopkeeper pays GST to the government Bu t. ttw -.,liu[)\..t'1.'; 1 t'
ta~ f,rp~~~ customers as a part of price of the commodity sold S ll. 1111p,1- t l)t u"' ,.,1 1 ' \' ' ~'
uttirn~Jtz~s~.i~ted to the consumers .
Non-tax Receipts
t.Jon-tax receipts are th0,.r- r~cejp t_s which a_rise frorn~r.caother than
taxes So f
-='- me o the non, tax receipts are as follows:
(i) Fees: A fee is a payment to the government for the services that it
renders to the people.
Examples: 'Land registration fees, birth and death re1istr1tlon ft,
P~ssport fees, cou rf fees, etc. -- .
It is to b
. e noted that fee is not a paym ~Fl~
5
fil14ce. It is a payment for a~
 :;.;_~t·
~ · - ; ,'. · ·. '~ .F.--.:.'
·
. ····•
6 ..,_ .;_._
'/
. ·, __....----A
I
provided to the people.
(ii) Ein_es: J:ines are U10!ie paymen t- wh1 ·h - rr rn ·,r1E 1 y ·~ ,
br":.:iL:Prs· t"' th" 1overn·,irnt These are eco nomic PUni h la"'
breaking taws. The a,m s rnents for
. .1s not to earn revenue, but to rnak
In
respectful to the laws. e Pea Ple V.
~ (iii) Escheat Escheat refers to that income of the state Which a .
- - - . · nses
of the property left by the people without a legal heir.1her 0 llt
claimants of such property. The government makes revenue are no
.tt. e out of
(iv) Special Assessment: Special assessment is that payment Which is
made by the owners of those properties whose value has appreciated
due to developmental activities of the government. Example: When
as a result of construction of roads or provision of sewerage system
or construction of drains, etc., value of the neighbouring property
or its rental value appreciates, then a part of the developmental
expenditure is recovered from the owners of such property by way
of special assessment.
(v) Income from Public Enterprises: Several enterprises are owned
by the government. Examples: Indian Railways, Nangal Fertilizer
Factory, Indian Oil, Bhilai Steel Plant, etc. Profit of these enterprises
are a source of revenue for the government.
(vi) Income from the Sale of Spectrum like 2G and 3G: Income from the
sa .e of spectrum has emerged as a significant source ot non-tax
receipts of the government.
(vii) Grants/Donations: Grants ?rP :ilea 1 -ource of government revenue.
It is very common for the people to offer donations and grants to
the government when there are natural calamities like earthquake.
floods and famines.
2) Capital Receipts
. are those monry receipts of the governmen t which sho'M
. receipts
Capital
the following two characteristics:
(.) ~1 .
1 ' i es,! 'N cJ pts r.rrc1te a l1ab1lity for the govern me nt · For e)(.a1
loans by the government are a liability. These are to be pa\i
These are, therefore, the capital receipts of the govern
(ii) These rece•pts cdu~e red uction in assets of th
stated earlier, money received by the gover
shares (say of Air India) would cause red
22
 Government Budget and The Economy
government. These are, therefore, to be
treated as capital receipts.
capital receipts are those money rece
Ins hor,t . ipts of the government
ither create a l1 ab1llty fo r the governme
whIc h e nt or cause a reduction
in its assets.
In India, capital receipts of the governme
nt budget are often classified
as under:
Capital Receipts
'
(i) Recovery of
Loans
(ii) Borrowings and
Other Liabilities
(i) Recovery of Loans: The central gove

1
(iii) Other Receipts
rnment offers loans to the
state governments to cope with financial
crises. When these loans
are recovered, assets of the governme
nt are reduced. Accordingly,
these are classified as capital receipts.
(ii) Borrowings and Other Liabilities: Whil
e lending creates assets,
borrowing creates liabi lity. According
ly, borrowings are to be
treated as cap ital receipts. It may be
noted that the government
borrows money from:
(a) the general public. [Borrowings from
the general public are
called market borrowings.]
(b) the Reserve Bank of India.
(c) the rest of the world.
(iii) Other Receipts: These include items
like 'disinvestment'. It is
the opposite of investment. Disinvest
ment occurs when the
goverr .... "',h ..,fn~ r,ff ts shares of publ
ic sector enterprises to
privat" ser-tnr It involves transfer of
ownership of public sector
enterprises to the private entrepreneurs
, leading to privatisation.
Money received through disinvestmen
t is treated as capital
receipt because it causes reduction in
assets of the government.
Q.1. va/ ~~ent? Does it refer to revenue recei
~ pt or capital receipt of the goVE '!I'
Ans,.,[) ·~~ ---~ '.
, efers to withdrawal of existi ng investmen
t.
~-~~l llllia ;,: ~vernment of India
is making disinvestment by sell1ns ii
.·15·--.. ..... ,. Ipt
.
of the government, as 1t. re duces assets of l
t,ie gm c'
Budget Expenditure
Budget expenditure refers to estimated expenditure of the governmen
during the fisca l year.
Like budget receipts, budget expenditure of the government is broadly
classified as:
(1) Revenue
---.. --
Expenditure, and
2) ~apital Expenditure.
1) Revenue Expenditure
C ~ ~~ ~
Revenue expenditure of the government is that expenditure which
th e following two characteristics:
.i) " uues not tr~ate any asset for the government. For e
expenditure by 'th . . •
e government on old-a ge pensions, sa~
scholarships ar t O b .
does not lead t e e treated as reve nue expenditure.
0
.. any type of asset formation.
(11) It does not cau
Expenditure b ; ~ any rC1duction in lia bility of
with natural y a~ ~f gr~nts to the state
reduce financi~~~:;;,~s (like floods and
1
Accordingly th' . Y of the central
, is is to be trea ted
In short as
, revenue expe ct·
government in a t· n iture ref e
1scal year h'
reduction in liab·l· , w 1ch
11t1es.
~ p
Government Budget and The Economy
irnportant Items of Revenue Expenditure in the
Indian Government Budget
These are:
(i) W!ge_bill o_f the government.
(11) Interest pa~ ments.
(iii) Expenditure on subsidies.
(i\) Defence purchases.
I
Important
As am
_ atter of.co~vention, all grants given by the centr.e to the state governments (and the governr:nents
of Union terr tones) are treated as revenue expenditure, even when some grants may result in the
creation of assets.
(2) Capital Expenditure
Capltal expenditure of the governm ent is that expenditure which shows
the fotlow1ng two characteristics:
(i) It crerites assets for the government. Equity (or shares) of the
domest'c or multinational corporations purchased by the
government may be cited as an example.
(ii\ h CrlJSes red ucr1on in liabilities of the government. Repayment of
[oansce-rtainly reduces liability of the government. Accordingly,
this is to be treated as capital expenditure.
n short, capital expen diture refers to the estimated expenditure of the
govem--re1t in a fiscal year which creates assets or causes a reduction in
aolcit,es.
Important Items of Capital Expenditure in the Indian Government Budget
These are:
(i) Expenditure on land and building.
(ii) Expenditure on machinery and eq uipment.
(iii) Purchase of shares.
(iv) Loans by the central government to the state governments or state
corporations.
,
Plan and Non-plan Expenditure
Budget expenditure (reve nue expenditure + capital expenditure}
cla ss,'fied as plan and non-plan expenditure. Following
• ·1s the l i ~
ctory Macroeconomics

,,
(l) Plan Expenditure:.Plan expenditurie refers to that expend·
. iture Wh'
relates to (i) spec1f1ed plans and programmes of develo . 1ch
. Prnent
(ii) assistance of the central government to the state g , and
. . . overnrr,
It includes both revenue expenditure (like assistance to th ents
and capital expenditure· (l'k
I e expen d't
I ure on the const e st0 t ·
. esi
. ruction
roads, bridges and hospitals). of
(2) Non-plan Expenditure: Broadly, all expenditure other tha
~ expenditure is classified as non-plan expenditure. Specificaun Plan
. l t t d't · Y,non.
dia, non-plan plan expen d1ture re a es o expen I ure on routine functioni
nditure is a . . l d d' ng of
,ficant part of the government. Or, 1t inc u es expen 1ture on such services
·ct· as of
otal government law and order, de fence an d su bs111es.
nditure. Which is why
l discipline in the Thus, we can write that:
nuy often rema ns a
ous challenge Budget Expenditure = Revenue expendilture + Capital expenditure
Or
Budget Expenditure = Plan expenditure + Non-plan expenditure
I
Note
After the abolition of planning commission, the government is also considering to abolish the
classification of budgetary expenditure as plan and non-plan expenditure.
Structure of Government Budget at a Glance
Government Budget
Budget Receipts
l~
Revenue

'
Budget Expenditure
Capital
Expenditure Expenditure
(wage bill, .interest (land and building,
r ..dp1tal Receipts machinery & equipment.
payments, subsidies,
defence plJrchases, purchase of shares, loa
et<: to state governments.
-:'ax Receipt:;
~:rronEt..Y
e.x:..e':l Jlf,
etC)
Rfv\?f! Ut' e-xpen,I .
[Note: Structure of the Govern
(i) Revenue Budv;et, and
revenue receipts and rev
Budget includes capit
government.]
326
~ 1.-lllf<I- ~ ·
Government Budget and The Economy
How are revenue expenditure different from capital expenditure in terms of their meaning and
Q.l. .. ,
significance.
Ans.
Following observations highlight the differe nce between revenue expenditure and capital
expenditure:
[ Revenue Expenditure I Capital Expenditure I
(i) Difference in Mea~ing:
Revenue expenditure does not impact
asset-liability status of the government.
ICapital expenditure impacts asset-liability status
of the government.
IP'

Assets and liabilities are not increased or

decreased .
Assets are raised .
Or
Liabilities are lowered.
I (ii) Difference in Significance:
(a) Revenue expenditure (subsidies and (a) Capitalexpenditure(publicinvestment) focuses
law & order) focuses on welfare of the
I people. It does not directly contribute
to GDP growth.

on GDP growth. It directly contributes to

GDP growth.
(b) High revenue expenditure by the (b) High capital expenditure by the government
government (by way of subsidies or points to the lack of private investment in
old-age pensions) points to poverty the economy. Capital expenditure by the
of the people or backwardness of the government is raised when the economy is
crono suffering from deflationary gap.
r.-J.
~
~s;,T-'1
1.&A:11 • • .• . • . . • .. • .. I I
..
..
. ~
•
Revenue Budget I Capital Budget I
(i) Revenu e budget includes revenue receipts (i) Capital budget includes capital rec:arDl[l
and revenue expenditure of the government. and capital expenditure of the gover
(ii) Revenue budget does not impact asset- (ii) Capital budget impact asset-liability st
liability status of the government. of the government.
(iii) Revenu e budget focuses on welfare ~f I(iii) Capital bud~e_t focuses on GDP
the people by way of DBT (direct benefit way of public investment).
transfers). It does not directly contribute to
GDP growth.
(iv) High revenue receipts in the revenue budget
.~';
lead to low capital receipts (borrowings and
d_isinvestment) in the capital budget. It Is a
sign of a growing economy.
ila1
1troductory Macroeconom,cs
4 BUDGET DEFICIT: REVENUE DEFICIT,
. FISCAL DEFICIT AND PRIMARY DEFICIT
[MEANING, TYPES AND MEASUREMENT]
What is Budget Deficit?
irypes of Budget Budget deficit (also ca lled government deficit) refers to a si tuation 'Nhe
Balanced Budget: budget expendi tures of th e government ar~ greater than •re b·Jdget
Budget Receipts
receipts. or, it is the excess of tota l expenditure (revenu e expenditure
= Budget Expenditure
and capital expenditure) over and above the total receipts (revenue
Deficit Budget
Budget Rece pts
receipts and capital receipts) of the government. .
< Budget Expenditure
Budget Deficit = Total expenditure (Revenue expenditure
Surplus Budget:
Budget Receipts
+ Capital expenditure - Total receipts (Revenue
> Budget Expenditure receipts + Capital receipts)
BD = BE - BR, when BE > BR
(Here, BD = Budget deficit; BE = Bu dget expenditure; BR = Budget
receipts.)
Types and Measurement
With reference to the budget of the Government of India, there are three
important types of budget deficit. Th ese are:
(1) Revenue Deficit,
(2) Fiscal Deficit, and
(3) Primary Deficit.
(1) Revenue Deficit
Revenue deficit is the excess of revenue expe nd iture ov
reteipts.
Revenue Deficit = Revenue expenditure - Reve
RD = RE - RH, when RE > RR
(Here, RD = Revenue deficit; RE
RR== Revenue receipts)
Implications
(i) Because of reve nue deficit, tt\!
expenditure on several w
leads to loss of social w
(ii) The government
ra ises liabilities
(ii i) The govern
8
~ -
Government Budget and The Economy
rnaY be lost to foreign companies. Consequently, economic control
of the foreigners may increase in the domestic economy.
Three Ways of Managing Revenue Deficit
I (i) Borrowing from the general public, RBI or rest of the world.
(ii) oisinvestmen~ by way of_s~lli~g its o~nership (shares) of public enterprises.
(iii) cut in expenditure (subs1d1es in particular).
(Z) Fiscal Deficit
Fiscal deficit is the excess of total expenditure over total receipts (other
than borrowings). , E
Fiscal Deficit= Tot!!_ _exp~nditure (Revenue expenditure + Capital
expenditure) - Totalrecefi>ts other than -borrowings
(Revenu_e_ 1ec.eip_ts_ t _9pital receipts other than
bo_!~o~wi_ngs) - \\: - \ R
FD= BE - BR other than borrowings, when BE > BR other than
~wings
(Here, FD= Fiscal deficit; BE= Budget expenditure; BR= Budget receipts.)
In fact, ~ • defril 1s the estmation of total borrowings by the
---
gc. er rn ent It is often called 'Gross Fiscal p_e_fi(jt'. - - ~ -~
Gross Fiscal Deficit= (i) Borrowing from RBI+ (ii) Borrowing from abroad
+ (iii) Net borrowing at home
I Gross fiscal deficit shows estimated borrowing by the government to cope with its expenditures during
the year. Often it is expressed as a percentage of GDP.
Implications
F;scal defc:t is an estimate of borrowings by the government. Greater
;:,1..at uenc1t ~mpues 1:,; e;atc.. borrowings by the government. It has
, following implicati ons:
(i) ln~tio~arySpiral: Borrowing from RBI is often linked to inflationary
spiral in the economy. This is how it happens: Borrowing from RBI H~1'
ingeases_money supply in the economy. lncreaseTnmoney supply
leads to increase in the general price level. A persistent increase in
th e general price level (over a period of time) leads to inflationary
spiral. [Bo_r:_r_qwing from RBI -►Jncrease in rno_ney_s~pply_.:1.J.!!£W•
in,E_ri_ces ➔-l;flationary spiralJ
(ii) National Debt: Fiscal deficit leads to national debt. It hi t,,.,
lg.
g~h. Because, a significant percentage ofnati
used up to pay the past debts.
 Introductory Macroec
~
i!~
High fiscal deficit leads to
.
{iii) Vicious . l e Of High fiscal Deficit
Clrc . and Low GDP Growth·• COnst
. t· l deficit leads to a situation where: (a) GDP grow th 1 ntty
low GDP growth becau~e hrgh ,sea . . d (b) t· rerna·
Of high fiscal defrcrt, an 1scal deficit re...... . h'ins
of two reasons: low because ,,,a,n
(i) The government lac~s because of low GDP growth. 5 rgh
funds for mve5tment,
and [High fiscal deficit ➔ Low GDP growth ➔ High fiscal deficit.]
M Owing to high fiscal (iv) Crowding-out: High fiscal deficit _leads to 'Crowding-out Effeci<;rhis
deficit. taxes are
raised This reduces • situation when high borrowings by the government (ow· ,.
d1sp05able mcome _
hrs. ah fiscal deficit) reduces . b 'l• _, 1ng to
the ava1la 1 1ty of funds"in th e
of the people. Low 1g . . ::::,< illone)
disposable income ma rket) for the private investors. Accordingly, overall in vestrn .
leads to low AD and the economy is reduced. ent rn
their tow inducement
~o invest ,n the
(v) Erosion of Governmen_t Credibility: High fiscal deficit (and
economy.
Also, low GDP growth consequently, the mounting national debt) ero des cred ibility of th
leads to high fiscal government in the domestic as well as internatio nal money rnarke~
deficit. Because, low GDP
generates low revenue for 'Credit rating' of the government (and the economy) is lowered.
the government. Owing to lower credit rating, glo_bal investors start Withdrawing
their investment from the domestic economy. Consequently, GOp
growth is reduced.
Briefly, fiscal deficit must NOT be allowed to rise beyond manageable
limits (about 3 per cent of GDP is consid ered to be manageable). High fiscal
deficit signals fiscal indiscipline. It points to a situation when GDP growth
is low and unemployment is high. The economy slips into stagnation and
revival becomes difficult without FOi (foreign direct investment).
(3) Primary Deficit
Primary deficit is the difference between fisca l deficit and interest
payment.
Primary Deficit = Fiscal deficit - Interest payment
PO= FD-IP
(Here, PD • Primary deficit; FD = Fiscal deficit; IP= Interest payment.)
While fiscal deficit shows borrowing requirement of the government
nclus,v,, of interest payment on the past l oans, primary de tct
f ·t shoW$
borrowing requirement of th e government t ,dust\ p of interest pay
other words, primary deficit indicates government borrowings on
of current year expenditures and current year receipts of the I
lrnpUcations
Implications of primary defi cit are similar to those
only d iffere nce is th at primary deficit does not c
payments on account of the past loans. Pri
borrowings When: Current year expendit
0
~ .,,,,..
Government Budqet and The Economy
Revenue Deficit, Fiscal Deficit and ~ r y Deficit- The Difference
-
Revenue Deficit
(i) It is the excess
of revenue

Fiscal Deficit
(i) It is the excess of total
expenditure over

Primary Deficit
(i) It is the difference
between fiscal

F@CUS
ZONE
expenditure over total receipts, other deficit and interest
revenue receipts. than borrowings. payment.
Revenue Deficit Fiscal Deficit Primary Deficit
== Revenue = Budget expenditure = Fiscal deficit
expenditure - - Budget receipts - Interest payment
Revenue receipts other than
borrowings
(ii) It reflects the need (ii) It reflects the extent (ii) It reflects the extent
for borrowings by of borrowings by the of borrowings by the
the government government when government when
to manage interest payment is interest payment is
its budgetary accounted for. not accounted for.
expenditure.
(iii) High revenue (iii) High fiscal deficit (in (iii) Primary deficit points
deficit arises terms of borrowings) to the need for
largely because points to the lack of borrowings even when
of low tax fiscal discipline in the interest payment on
receipts and high country. It is a hurdle the existing loans is
expenditure on in the process of GDP ignored. It reflects
subsidies. It points growth. continuous lack of
to overall poverty fiscal discipline in the
in the country. country.
ary deficit mean?
.
----II
rnment reso rts to borrowing only to cle ar the backlog of interest payments. TherF
.
ecause of the excess of current year expenditure over the cur rent year revenue "
. -, --· ._nt year expenditure happe ns to be equal to current
---[Q.U year revenue. It is a sign
- ~ f f l !_cal respon si bility o n t he part of the government.
;budget shows a primary deficit of ~ 6,900 crore. The revenue expenditure ~1
O crore. How much is the fisca l deficit?
p rimary deficit+ Interest payment
i 6,900 crore + f 400 crore
t 7,300 crore.
gulf between capital expenditure and capital receipts be rNIL',
ways.
vernment can resort to disinve~tmer1t, 1 e, ',l'll111i: 11,, 't,1l, ·
vernme nt can sell its surplus land
be a fiscal deficit without a revenue deficit?
''~~~ ~ IO_hlsty yes, Because fiscal def1c1t j,, wrn kHJ '· "1 1 ! 1
1
; . i,r.....-fi5t"~ and expenditures of the ~'.CH'(·: 1. 11, · 1
· ·~:}i><.Re_n?1ture are in a state of balanc r, 1 r,,,, 1 •
:causing fiscal def1c1t
 An Illustration on the Estimation of Various Types of
Budget Deficits
The illustration is based on t he fo llowing set of data d
Economic Survey, 2020-21. rawn fr om
Budget Estimates on the Budgetary Status of the
Government of India (2020-21)
Items
1. Revenue Receipts
2. Revenue Expenditure
3. Capital Receipts
4. Capital Expenditure
5. Total Receipts (1+3)
6. Total Expenditure (2+4)
7. Recoveries of Loans and Ot her Receipts
8. Borrowings and Other Liabi lities
9. Interest Payment
Using the estimation procedure discussed earlier, we get th
estimates of different types of bu dget deficit:
(1) Revenue Deficit = Revenue Expenditure - Revenue R
= ~ 26,30,145 crore - ~ 20,20,926 cror,
= ~ 6,09,219 crore
(2) Fiscal Deficit
: Total Expenditure - (Revenue Receipts+ Recoveri
()tt,Pr RPceipt,)
= ~ 30,42,230 crore - (~ 20,20,926 cro re + ~ 2,24,967
= ~ 7,96,337 crore
Or
f 1scal Deficit . borrowings and Other Liabi lities
= 7 7,96,337 crore
(3) Primary Deficit , . hsral Deli LIi - Interest Pa yment
= t 7, 96,337 crore - t 7,08,203 cror&'
= t 88,134 crore
[Implying that:
Fiscal Deficit = Primary Deficit+ Interest Pa yment
= ~ 88,134 crore + ~ 7,08,203 crore
= ~ 7,96,337 cro re]
......--
Government Budql't and The Economy
s. BALANCED AND UNBALANCED BUDGET
(l) Balanced Bud~et . .
lanced budget 1s that budget in which governmen t receipts are
A ba .
o government expenditure.
equa l t
Balanced Budget:
Government Receipts = Government Expenditure
Merits and Demerits of Balanced Budget
Merits ~~("I'\~~~ ½ \{.J, ~
(i) The government does not indulge in ~ f u l expeodit11ce. •
(ii) A balanced budget ensures fi~cia~stabi!ity. It signals fiscal Ne~
~cipline in the economy. o) t..:,.1".,· n...JJ. J(J} r:~ff-,,- t
However, during the general depression of 1930's, the policy of
balanced budget wasfs~verely: criticised.., It was then that the following
shortcomings of a balanced budget were highlighted.
Greet~ .11-99\JR/\.A.,\'\JJ"t) _)
Shortcomings or Demerits
~\)~~
(i, Balanced budget does not offer any soluti on to the problem of
unemployment. Particularly, when unemployment is linked with the
lack of AD. It happened in most European Countries during 1930's. ~~~
(ii) Balanced budget is not conducive to growth in less developed
~
countries. Kick-start of growth in these economies depends Qn a
big-push of/Investment ex~enditure by the fover_nment)rhis often • , () O (l
t~sroctefic1tbu dget. o )~,-~:j ~- - v ~ J':"· ( )l.~ '}Si#.::
91 -~~- ~,~~~
Does Balanced Budget Leave Aggregatel>emand Unaffected in the Economy?~
~o is the obvious reply. This is how it happens: ~ °'-fi~~
Balanced Budget means:
Government receipts = Government expenditure
Assume tax as the only .source of government receipts,
Tax of (say)~ 100 = Expenditure of~ 100
Expenditure of? 100 increases AD by~ 100.
Tax oft 100 does not decrease /1.D by ( 100.
Tax oft 100 decreases disposable income of the people by~ 100.
If MPC is assumed to be 0.5, then reduction in disposable income by? 100 would reduce co
(expenditure) by 0.5 x { 100 = t so which is 'MPC times' decrease in income.
Thu s, because of tax of { 100, AD would decrease by t SO only.
Net increase in AD =f 100 (increase in AD owing to government expenditure)
- t SO (decrease in AD owing to tax)= f 50.
:hu s, a balanced budget is expected to increase AD. Accordingly, bala.
instrument to increase AD when the economy is close to achieving full
 onomic5
·ory Macroec
l) unba lanc·ed su
· etd.sgethat t budget in which
. rece .
ipts and expend·
. . 1ture
( Lanced bU dg 1 ual This maY be a s1tuat1on of: (i) 5 s
An un ba nt are not eq . urplus
f the governrr1e . d et
o ('') ciefic1t BU g ·
sudget. or 11
(1). surp tus suclget . .
h. h government receipts are greater th
. . budget in w ic an
This 1s a .
rnent expenditures.
govern
surplus sudget:: ent Receipts> Estimated
. Government
s · G ernm Expenditures
E timatE» d ov
Merits aod Demerits of surplus Budget
Merits:
surplus budget (when, receipts > expenditures) is desired when the
economy is battling inflation due to excess AD. Surplus budget plugs the
inflationary gap by lowering the level of AD. AD is lowered on account
o' (a) rise in revenue collection by the government, and (b) fall in
government expenditure.
Demerits:
As surplus budget tends to lower the level of AD in the economy, it is
rot desired during periods of depression. If surplus budget policy is
constantly pursued by the government, AD may reduce to a level that
causes unemployment in the economy. The economy may be driven into
a low level equiilibrium trap.
'i) Deficit Budget
This is a budge>t
overnme t · . in wh·ic h government expe nditures are greater thall
g n receipts
Deficit Budget:
Est ••mated Government Expenditures> Estimated Govern ment
Receipts
. 1
Keynes and other modern economists stress s1gn ·t·1can ce of de!
budget, highlighting its merits.
Merits and Demerits of Deficit Budget
Merits:
Keynes recommends deficit budget as a key instru~e
the state of depression. According to him, depression
conomT~ltJ when the ~
1
low level of AD. Consequently, ~lanned output is
 nomy
ll employment level of output. Unemployme nt becomes a national
~~oblern. Deficit budget raises the level of AD in two ways:
(a) Directly by way of high governme nt expenditure, and
(b) Indirectly by inducing greater (investment and consumption)
expenditure by the people.
Demerits:
Deficit budget is not desired during periods of inflation. It is a period when
the AD exceeds AS at full employment. Deficit budget in such situations
(when AS cannot increase) would further increase the gulf between
AD and AS. Consequen tly, inflationary gap would rise and wage-price
spiral (when wages increase with prices and prices increase with wages)
may set in.
Power Poi,nts & Revision Window
~ -is a statement of expected receipts and expenditure of the government over the period of a financial
year, April 1-March 31.
Objectives: (i) GDP growth, (ii) Allocation of resources, (iii) Provision of public goods, (iv) Redistribution
of income and wealth, (v) Balanced regional growth, (vi) Employment opportunities, (vii) Economic
stability.
Structure of the Budget includes (i) revenue budget showing revenue receipts and revenue expenditure of
the government, and (ii) capital budget showing capital receipts and capital expenditure of the government.
Looked at from a different angle, structure of the budget includes: (i) budget receipts (including revenue
receipts and capital receipts), and (ii) budget expenditures (including revenue expenditure and capital
expenditure).
Sa1I1,i are the estimated money receipts of the government from all sources during a fiscal year.
Revenue Receipts are those receipts: (i) which do not cause any reduction in assets [Example: Income
from public sector enterprises], and (ii) which do not create any liability for the government [Example:
Tax receipts of the government].
Capital Receipts are those receipts: (i) which create liability for the government [Example: Funds recei ved
b~ the government as loans], and (ii) which cause reduction in assets of the government [Example:
Disinvestment in public sector enterprises].
~~et Expenditure is the estimated expenditure of the government relating to its development and non-
- development programmes during a fiscal year.
Revenue Expenditure is that expenditure by the government (i) which d~~s n~t cause
· , [ l •E d'1ture on law & order] and (11) which does
increase in government assets Examp e. xpen · .
· l' b'l't [Example· Expenditure on old-age pensions].
not cause any reduction in government 1a 11Y · _ . . .
· b h rnment (1) which causes increase an
Capital Expenditure is that expenditure Y t e gove .. .
· h t uction of roads] and (11) which causes
government assets [Example: Expenditure on t e cons r ·
· · · [ l . p ment of loan by the government].
reduction in government l1ab1lIty Examp e. ay .
es of development, as well as assistance
Plan Expenditure is related to specified plans and programm le: Ex enditure on the construction of
of the central government to the state governments. [Examp P
canals for irrigation.]
N . · f f10 ning of the government
on-plan Expenditure is related to expenditure on routine unc . .
[Example: (i) Expenditure on law & order, and (ii) Expenditure on defence & subs1d1es.)
336