Fiscal Deficit

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WHAT IS FISCAL DEFICIT? It is difference between total Receipts and Total Expenditure Excluding borrowings ADD REVENUE EXP CAPITAL EXP TOTAL EXPENDITURE Less REVENUE RECEIPTS CAPITAL RECEIPTS (Non Debt)* FISCAL DEFICIT *Here we take all capital receipts But do not include borrowings Type of Capital Receipts Receipts which Create Liability Receipts which Reduce Assets Example Loan taken They are called Debt Creating Capital Receipt These are taken while calculating Fiscal Deficit They are called Non Debt Creating Capital Receipt These are not taken while calculating Fiscal Deficit Example 1 How to calculate Revenue and Fiscal Deficit RECEIPTS Revenue Receipts Capital Receipts (Non-debt) Capital Receipts (Debt) Total EXPENDITURE Revenue Exp Capital Exp Total 3000 2000 1000 6000 4500 1500 6000 Revenue Deficit =Revenue Exp-Revenue Receipts =4500-3000 =1500 Fiscal Deficit =Total Exp-Revenue Receipt- Capital Receipt (non debt) =6000-3000-2000 =1000 Example 2 CALCUALTE REVENUE DEFICIT AND FISCAL DEFICIT REVENUE RECEIPTS Tax Revenue Non Tax Revenue Total CAPITAL RECEIPTS Recovery Of Loans Given From Sale of PSU(disinvestment) From Borrowings Total REVENUE EXPENDITURE CAPITAL EXPENDITURE What is Revenue Deficit and Fiscal Deficit 100 200 300 50 250 400 700 600 400 Answer Calculation of Revenue Deficit Revenue Expenditure 600 Revenue Receipts 300 Revenue Deficit 300 Calculation of Fiscal Deficit Revenue Exp Capital Exp Total Expenditure Revenue Receipts Capital Receipts (Non-debt) Total Receipts Fiscal Deficit 600 400 1000 300 300 600 400 NOTE Borrowings Fiscal deficit hence, Fiscal Deficit=Borrowings 400 400 Example 3 Calculate Revenue Deficit and Fiscal Deficit REVENUE RECEIPTS Tax Revenue Non-tax Revenue Total CAPITAL RECEIPTS Recovery of Loan Given From Borrowings Total REVENUE EXPENDITURE CAPITAL EXPENDITURE 1.8 1.2 3.0 0.9 9.1 10.0 5 8 WHAT IS REVENUE DEFICIT AND FISCAL DEFICIT? Answer Calculation of Revenue Deficit Revenue Expenditure 8 Revenue Receipts 3 Revenue Deficit 5 Calculation of Fiscal Deficit Revenue Exp 5 Capital Exp 8 Total Expenditure 13 Revenue Receipts 3 Capital Receipts 0.9 (Non Debt) Total Receipts 3.9 FISCAL DEFICIT 9.1 NOTE BORROWINGS 9.1 FISCAL DEFICIT 9.1 HENCE FISCAL DEFICIT=BORRWINGS Example 4 Calculate Revenue Deficit and Fiscal Deficit Revenue Receipts (a + b) 7 Tax Revenue 6 Non-Tax Revenue 1 Revenue Expenditure 10 Out of which Interest Payments 3 Major Subsidies 1 Defence Expenditure 2 Capital Receipts (a + b +c) 5 Recovery of loans 1 Receipts from PSU Disinvestment 1 (c) Borrowings 3 Capital Expenditure 2 ANSWER Revenue Deficit Revenue Expenditure 10 Less Revenue Receipts 7 Revenue Deficit 3 Fiscal Deficit Revenue Exp 10 Capital Exp 2 Total Expenditure 12 Revenue Receipts 7 Capital Receipts(Non Debt) 2 Total Receipts 9 Fiscal Deficit 3 NOTE Borrowings 3 Fiscal deficit 3 Hence fiscal deficit= Borrowings EXAMPLE 5 NCERT Page 71 Revenue Receipts (a + b) 9 Tax Revenue 7.3 Non-Tax Revenue 1.6 Revenue Expenditure 10.9 Out of which Interest Payments 3.1 Major Subsidies 1.4 Defence Expenditure 1 Capital Receipts (a + b +c) 4 Recovery of loans 0.1 Receipts from PSU Disinvestment 0.4 (c) Borrowings 3.2 Capital Expenditure 1.8 ANSWER Revenue Deficit Revenue Expenditure 10.9 Less Revenue Receipts 9 Revenue Deficit 1.9 Fiscal Deficit Revenue Exp 10.9 Capital Exp 1.8 Total Expenditure 12.7 Revenue Receipts 9 Capital Receipts(Non Debt) 0.5 Total Receipts 9.5 Fiscal Deficit 3.2 NOTE BORROWINGS 3.2 FISCAL DEFICIT 3.2 Hence FISCAL DEFICIT=BORRWINGS Why Gross Fiscal Deficit Is Equal to Borrowings Suppose a country wants to make Revenue Expenditure Capital Expenditure Total To Meet this expenditure. Govt has following Receipts Revenue Receipt Capital Receipt (Sale of PSU) Total Receipts 4000 6000 10000 7000 2000 9000 Hence, Govt is short of funds of Rs 1000 So Govt will have to take loan Of Rs 1000 Hence Fiscal Deficit=Borrowings=1000  This is Fiscal Deficit This is Borrowings Formula Derivation  Why Fiscal Deficit=Borrowings To meet all expenses ,Expenditure should be equal to Receipts Expenditure = Receipts Capital Exp + Revenue Exp = Capital Receipts+ Revenue Receipts Capital exp + Revenue Exp = Capital Receipts(non debt) + Capital Receipts(debt) + Revenue Receipts Capital exp + Revenue Exp - Capital Receipts(non debt)- -Revenue Receipts = Capital Receipts (debt) Fiscal Deficit =Capital Receipts (debt) Fiscal Deficit =Borrowings WHY REVENUE DEFICIT IS A PART OF FISCAL DEFICIT? We know that Fiscal Deficit =Revenue Receipts + Capital Receipts (non debt) - Revenue Exp - Capital Expenditure =(Revenue Receipts-Revenue Exp) + Capital Receipts(non debt) – Capital Expenditure =Revenue Deficit + Capital Receipts(non debt) – Capital expenditure Hence, Revenue Deficit is a part of Fiscal Deficit. More the Revenue Deficit, More will be Fiscal Deficit What does Revenue and Fiscal Deficit Indicate Revenue Deficit denotes Excess consumption Exp (Country spending more on day to day expenses) Fiscal Deficit denotes Borrowings (We have already studied Fiscal Deficit=Borrowings) Note Revenue Deficit is a part of Fiscal Deficit If there is large share of Revenue Deficit in Fiscal Deficit It means Excess consumption expenditure has lead to more borrowings Example Effect of increase in Excess Consumption Expenditure on Deficit REVENUE RECEIPTS TAX REVENUE 100 100 NON TAX REVENUE 200 200 TOTAL 300 300 CAPITAL RECEIPTS RECOVERY OF LOANS GIVEN 50 50 FROM SALE OF PSU 250 250 (DISINVESTMENT) FROM BORROWINGS 400 500 TOTAL 700 800 REVENUE EXPENDITURE 600 700 CAPITAL EXPENDITURE 400 400 What is Revenue Deficit and Fiscal Deficit? What happens to these Deficits if Consumption Expenditure Increases by 100? Answer CALCULATION OF REVENUE DEFICIT REVENUE EXPENDITURE 600 700 REVENUE RECEIPTS 300 300 REVENUE DEFICIT 300 400 Calculation of Fiscal Deficit REVENUE EXP 600 700 CAPITAL EXP 400 400 TOTAL EXPENDUTURE 1000 1100 REVENUE RECEIPTS 300 300 CAPITAL RECEIPTS (Non Debt) 300 300 TOTAL RECEJPTS 600 600 FISCAL DEFICIT 400 500 If Revenue Deficit Increases by 100 Fiscal deficit also increases by 100