GLOSSARY

What does the term ‘fiscal deficit’ mean?

 In essence, the fiscal deficit represents the total amount of borrowed funds required by the government to completely meet its expenditure. Thus, it is the gap between the government’s total spending and the sum of its revenue receipts and non-debt capital receipts.

 What are the GoI’s revenue and capital receipts?

The government’s revenue receipts consist of its tax revenues (net of the share of the states) and non-tax revenues like interest on loans given to states, dividends and interest paid by public sector firms etc. its capital receipts consist overwhelmingly of borrowings, but also include repayments of loan principals by states etc. and any money raised from disinvestments. The repayments and disinvestments proceeds are what we referred to as ‘non-debt’ capital receipts above.

 What is the significance of the fiscal deficit?

As with any household budget, the extent of the fiscal deficit tells us how much the exchequer is living beyond its means. A large fiscal deficit, therefore, implies a large volume of borrowings which would, obviously, create a corresponding burden of interest payments for the future. Further, a large fiscal deficit also has the more immediate impact of fueling inflationary pressures. It therefore effectively imposes an ‘inflation tax’.

 Is the GoI’s method of measuring the fiscal deficit the universal norm?

No. In fact, from a economic perspective, a more meaningful measure of the fiscal deficit would include the borrowings of the entire government itself, but also the public sector. It is worth mentioning here that it is not just the fiscal deficit of the central government that matters, but the combined fiscal deficit of centre, states and local governments, which gives a more realistic picture of the extent to which all levels of government are mortgaging the future to meet current spending.

 What is the revenue deficit referred to in the budget documents?

This is the gap between revenue receipts and revenue expenditure. We’ve already seen what revenue receipts are. Revenue expenditure may be described as current expenses as distinct from investments, which are capital expenditure.

To use a household analogy, payments for electricity, the maid, the grocery bills would be revenue expenditure, whereas money spent on adding a room would constitute capital expenditure.

Thus, the revenue deficit tells us how big the gap is between the government’s current expenses and its current income stream. The bulk of the centre’s revenue expenditure today is on interest payments and wages for its own staff and defence personnel.

 Is the significance of the revenue deficit different from that of the fiscal deficit?

Indeed it is. While the fiscal deficit tells us how much the government has to borrow, the revenue deficit gives us a better fix on what it needs to borrow for.

To return to the household analogy, the revenue deficit tells us whether the owner is borrowing to pay the grocer or is doing so to add a room. Given the same level of the fiscal deficit, therefore, a higher revenue deficit is worse news than a lower one.

In fact, some economists argue that for this reason the revenue deficit is a more important indicator that the fiscal deficit.

 What is the primary deficit and what does it signify?

The primary deficit is simply the fiscal minus the interest payments. What it tells us, therefore, is how much of the government’s borrowings are going towards meeting expenses other than interest payments. The idea of this parameter is to see how much the government is borrowing thanks to the sins of the past (which commit it to interest payments) and how much it its borrowing as a continuance of its profligate ways.

Thus, a low or zero primary deficit would suggest that while its interest commitments on earlier loans have compelled the government to borrow, it is alive to the need to tighten its belt. A high primary deficit would suggest the converse.

 What are the relevant figures for the GoI?

Since budget estimates are notoriously unreliable, let’s consider the revised estimates for ’99-00. The fiscal deficit was at 5.6 percent of gross domestic product (GDP), the revenue deficit at 3.8 percent and the primary deficit at 0.9 percent of GDP was at its highest since ’93-94. Thus, the GoI has not only borrowed heavily and for the wrong purposes, but it continues to do so.