GFS 1986

Basic Concepts and

Case Study for India

Presented by

Prof. Tarun Das

IILM, New Delhi-110001.
Presently ADB Adviser, MOF, Mongolia.
Formerly, Eco. Adviser, MOF, India.

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 Contents
1. GFS 1986 Accounting Systems
2. Case Study for India
3. Fiscal Responsibility and Budget
Management Act 2003 of India
4. Workout Session for India

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1.1 GFS 1986 Accounting System
1. GFS 1986 basically deals with compilation
of statistics on govt finances. The focus is
on formulation of budget, which is the
account of govt revenues and expenditure,
and govt receipts and payments.
2. Receipts and Revenues- All revenues are
receipts, but all receipts are not revenues.
Receipts are classified as current receipts
and capital receipts.
• Current receipts are those receipts which
do not have obligations for repayments
such as taxes and duties, interest earnings,
rents, dividends, profits, grants etc.
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1.2 GFS 1986 Accounting System
• Capital receipts consist of loans from
domestic and foreign sources and have
attendant obligations of amortization and
interest payments.
3. Expenditures and payments- Similarly, all
expenditures are payments, but all
payments are not expenditure. Repayments
of loans are not expenditure.
4. Requited and unrequited transactions-
Requited transactions are those in which
money is paid or received in exchange of
goods or services. But, transfers and grants
are unrequited expenditure as nothing is
received in return of money.
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1.3 Summary table of govt operations

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1.4 Summary table of govt operations

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1.5 Summary table of govt operations

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 1.6 Government Deficit/ Surplus

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1.7 Implications of government deficit

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 2.1 Case Study for India
1. India is in the process of migrating to GFS
2001, but still it uses GFS 1986 system and
cash accounting for budget formulation.
2. Both Receipts and Expenditure have two
accounts- Revenue and Capital.
3. Revenue Account is the current account
and is closed within a year.
4. On the other hand, Capital Account is not
normally closed within a year and continues
for a number of years until all obligations
are met by the govt.
5. Govt has no obligations to anybody for
revenue receipts. But, govt has obligations
for capital receipts.
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 2.2 Basic Concepts
6. Like receipts, expenditure has also two
accounts- revenue and capital.
 Revenue expenditures relate to current
expenditure such as wages and salaries,
maintenance, subsidies, grants, interest
payments. These expenditures do not lead
to asset creation or value addition
 Capital expenditures (such as
expenditures on plant, machinery, land,
property etc.) lead to asset creation and
value addition.
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 2.3 Other classifications
7. Plan and non-plan expenditure- If any project
or program is approved by the Indian Planning
Commission as a part of the National Five Year
Plan or Annual Plan, expenditure for that project
or program is called Plan Expenditure and all
other expenditures are classified as Non-Plan
Expenditures.
8. Developmental and non-developmental-
Internationally, expenditures are classified as
Developmental and Non-Developmental
Expenditures. Any expenditure which leads to
higher production and economic development is
called developmental expenditure, all others are
classified as Non-Developmental expenditures.

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 2.4 Classification of Expenditure
 There is no one-to-one correspondence among
these classifications.
 Cross-Classification of expenditure in Budget
2006-07 (Rupees billion)
Type Plan Non-plan Total
Revenue 1438 3444 4882
(26%) (61%) (87%)
Capital 290 468 758
(5%) (8%) (13%)
Total 1728 3913 5640
(31%) (69%) (100%)

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 2.5 Classification of Expenditure-
Some typical examples
(a) Interest payments- Revenue, non-plan,
non-developmental expenditure
(b) Food subsidy- Revenue, non-plan, non-
developmental expenditure
(c) Fertiliser subsidy- Revenue, non-plan,
developmental expenditure
(d) Construction of national highways- Capital,
plan, developmental expenditure
(e) Construction of border roads for defense
and national security- Capital, plan, non-
developmental expenditure

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 2.6 Classification of Expenditure-
Some typical examples
(f) Salaries of staff of a National University-
Revenue, plan, developmental expenditure
(g) Salaries of staff of a National University under
construction- Capital, plan, developmental
Expenditure
(h) Construction of government hospitals/
government schools- Capital, Plan,
developmental expenditure
(i) Grants for private hospitals/ private schools –
Revenue, non-plan, developmental
expenditure
(j) General grants to subnational Govts- Revenue,
non-plan, non-developmental
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 2.7 Classification of Receipts
1. Revenue and capital receipts
2.Revenue receipts- Taxes and Non-taxes
 Taxes- Direct (personal income, corporate
income, dividends tax etc.) and indirect
(customs, excise, services tax, VAT etc.)
 Non-taxes- Interest receipts, profits,
dividends, fees, service charges, grants etc.
3. Capital receipts include recovery of loans,
disinvestment of government equity, market
and other borrowings, use of public funds
4. Non-debt creating receipts include all
revenue receipts, recovery of loans and
disinvestment of govt equity.
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 2.8 Different Concepts of Deficits
 Revenue deficit= Revenue expenditure less
revenue receipts
 Capital deficit= Capital expenditure less
capital receipts
 Budget deficit= Total expenditure less total
receipts= Revenue deficit +Capital deficit
 Gross Fiscal Deficit= Total expenditure less
Non-Debt receipts= Total Expenditure less
(Revenue receipts+recovery of loans+
disinvestment of govt equity)
 Gross Primary deficit= Gross Fiscal Deficit less
interest payments
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 2.9 Different Concepts of Deficits
 Net Fiscal Deficit= Gross Fiscal Deficit less
Net Lending
 Net Primary Deficit= Net Fiscal Deficit less
Net Interest Payments
 Net Lending = Loans given by the central
govt to the States and PSUs less recoveries of
past loans from them
 Net Interest Payments = Interest payments
less interest receipts
 Net RBI Credit to the central govt = RBI’s
holdings of Treasury Bills, govt of India dated
securities, rupee coins, and other loans and
advances taken by the govt from RBI.
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 2.10 Indian Budget 2006-07
Items Rs. Billion
1. Revenue receipts (a+b) 4035
(a) Tax revenues 3272
(b) Non-tax revenues 763
(b1) Interest receipts 206
2.Capital receipts, of which 1605
(a) Recovery of loans 80
(b) Disinvestment 38
(c) Borrowings & other liability 1487
3.Total receipts (1+2) 5640
4.Revenue expenditure 4882
(a) Interest payments 1398
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 2.11 Indian Budget 2006-07
Items Rs. Billion
5.Capital expenditure 758
5a. Loans to states and PSUs 102
6. Total expenditure (4+5) 5640
7.Revenue deficit (4-1) 847
8.Capital deficit (5-2) -847
9.Budget deficit= (7+8)=(6-3) 0
10. Gross fiscal deficit 1487
=(6-1-2a-2b)=2c
11. Primary deficit= (10-4a) 89
12. Net lending =(5a-2a) 22
13. Net fiscal deficit = (10-12) 1465
14. Net primary deficit=(13-4a+1b1) 273
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 3.1 Fiscal Responsibility & Budget
Management (FRBM) Act 2003
• FRBM Act 2003 and FRBM Rules 2004 came
into force w.e.f. 5 July 2004.
• The Act mandates the Central govt to eliminate
revenue deficit by March 2009 and to reduce
fiscal deficit to 3% of GDP by March 2008.
• Under section 7 of the Act, the central govt is
required to lay before both houses of
Parliament Medium Term Fiscal Policy
Statement, Fiscal Policy Strategy Statement
and Macro Economic Framework Statement
along with the Annual Financial Statement and
Demand for Grants.

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 3.2 FRBM Rules 2004

• Reduction of revenue deficit by 0.5%

of GDP or more every year.
• Reduction of gross fiscal deficit by
0.3% of GDP or more every year.
• No assumption of additional debt
exceeding 9% of GDP for 2004-05 and
progressive reduction of this limit by
at least one percentage point of GDP
in each subsequent year.
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 3.3 FRBM Rules 2004
• No guarantee in excess of 0.5% of
GDP in any financial year.
• Four fiscal indicators to be projected
for the medium term. These include
revenue deficit, fiscal deficit, tax
revenue and total debt as % of GDP.
• Greater transparency in the budgetary
process, rules, accounting standards
and policies having bearing on fiscal
indicators.
• Quarterly review of the fiscal situation.
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 3.4 FRBM Rules 2004
• The rules mandate the Central
Government to take appropriate
collective action in the case of revenue
and fiscal deficits exceeding 45% of
the budget estimates, or total non-
debt receipts falling short of 40% of
the budget estimates at the end of
half year of the financial year.
• The rules also prescribe the formats
for the mandatory statements.
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 3.5 Current Fiscal Background
(as % of GDP)

Item 2005-06 2006-07 2006-07 2007-08

Actual BE RE BE
1.Revenue 2.6 2.1 2.0 1.5
Deficit
2.Fiscal 4.1 3.8 3.7 3.3
Deficit
3.Primary 0.4 0.2 0.1 (-) 0.2
Deficit

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 3.6 Medium Term Fiscal Indicators
Items 2006- 2007- 2008- 2009-
07 RE 08 BE 09 10
Target Target
1.Revenue Def 2.0 1.5 0.0 0.0
as % of GDP
2.Fiscal Deficit 3.7 3.3 3.0 3.0
as % of GDP
3.Gross tax 11.4 11.8 12.3 12.7
rev.
as % of GDP
4.Year-end 64.4 61.4 58.6 56.0
debt stock (%
of GDP)
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 4.1 Indian Budget 2007-08
Items Rs. Billion
1.Tax revenues 4039
2.Non-tax revenues 825
2a.Interest receipts 193
3. Capital receipts 1941
3a. Recovery of loans 15
3b. Disinvestment of govt. equity 417
4.Revenue expenditure 5579
4a. Interest payments 1590
5.Capital expenditure 1226
5a. Loans to States and PSUs 45
6.Memo item: GDP at current mp 45730

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 4.2 Workout Session-1
Given data on Indian Budget 2007-08 in Slide-
4.1, estimate the following in Rs.billion and
express these as percentage to GDP:
1. Revenue deficit
2. Capital deficit
3. Budget deficit
4. Gross Fiscal Deficit
5. Gross Primary deficit
6. Net lending
7. Net interest payments
8. Net Fiscal Deficit
9. Net Primary deficit
Use the following Excel File:
UNSIAP Tarun Das Session-4 GFS Workshop-1

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 Thank you –
Have a Good Day

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