Revenue Deficit & Fiscal Deficit

What is fiscal deficit?
The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings needed by the government. While calculating the total revenue, borrowings are not included.

Generally fiscal deficit takes place due to either revenue deficit or a major hike in capital expenditure. Capital expenditure is incurred to create long-term assets such as factories, buildings and other development. A deficit is usually financed through borrowing from either the central bank of the country or raising money from capital markets by issuing different instruments like treasury bills and bonds.

What is the difference between fiscal deficit and primary deficit?
Primary deficit is one of the parts of fiscal deficit. While fiscal deficit is the difference between total revenue and expenditure, primary deficit can be arrived by deducting interest payment from fiscal deficit. Interest payment is the payment that a government makes on its borrowings to the creditors.

What are the views of different experts on fiscal deficit?
Economists differ widely on their views on fiscal deficit. According to John Maynard Keynes, a deficit prevents an economy from falling into recession, while another school of thought is that a country should not have fiscal deficit.

Many economists think that if the deficit is financed by raising debt from the central bank it may lead to an inflationary scenario. Higher fiscal deficit is one of the reasons for the Indian economy to have relatively higher inflation.

What is revenue deficit?
A mismatch in the expected revenue and expenditure can result in revenue deficit. Revenue deficit arises when the government’s actual net receipts is lower than the projected receipts. On the contrary, if the actual receipts are higher than expected one, it is termed as revenue surplus. A revenue deficit does not mean actual loss of revenue.

Let’s take an hypothetical example, if a country expects a revenue receipt of Rs 100 and expenditure worth Rs 75, it can result in net revenue of Rs 25. But the actual revenue of Rs 90 is realised and an expenditure is Rs 70. This translates into net revenue of Rs 20, which is Rs 5 lesser than the budgeted net revenue and called as revenue deficit.

Current Situation

India’s Current Account Deficit (CAD) as a percentage of gross domestic product (GDP) rose to an all-time high of 5.4 per cent in the second quarter of 2012-13 on account of widening of trade deficit and slower growth in visible, the Reserve Bank of India (RBI) said in its monthly bulletin for March.The budget 2013-14 pegged the fiscal deficit at 4.8 % and as per the revised estimate of 2012-13, it is expected to be at 5,2 % of GDP.The fiscal deficit in our country is mainly driven by revenue deficit. In the year 2011-12, the share of revenue deficit in fiscal deficit was 76.43% and for year 2013-14 expectation is about 70%. You can have a look at the targets of fiscal consolidation in given table.

To check & manage the Deficit, government has enacted an Act which is called as FRBM Act.

What is the FRBM Act?
The Fiscal Responsibility and Budget Management Act was enacted by Parliament in 2003 to bring in fiscal discipline. It received the President’s assent in August the same year. The United Progressive Alliance (UPA) government had notified the FRBM Rules in July 2004. As Parliament is the supreme legislative body, these will bind the present finance minister P Chidambaram, and also future finance ministers and governments.

How will it help in redeeming the fiscal situation?
The FRBM Rules impose limits on fiscal and revenue deficit. Hence, it will be the duty of the Union government to stick to the deficit targets. It also empowers RBI for taking measures to control Inflation. The Act also provide exception to government in case of natural calamity and national security.

Calculation of GDP

How GDP calculated and what is are these income, production and expenditure methods ?

GDP is calculated by three methods.
Theoretically all three of them should give same final number, but in reality there will be slight difference between each of them.

#A: EXPENDITURE METHOD OF COUNTING GDP
Here you count the money spent by everyone.

So How to make a ‘technical’ formula? Ask yourself, where is the money changing hands? There are five components of that.

#1: CONSUMPTION BY PRIVATE CITIZENS [C]
like you and me buying (overpriced) daal, vegetables and milk (courtesy: Sharad Pawar).
I buy your second-hand bike for 15,000 Rupees, should we including it in the consumer Expenditure (C) ? Nope. Because the bike Is not ‘produced again.

When you had bought that bike for Rs.30000, 10 years ago, we had counted that money in that year’s GDP. So second hand-product sale money cannot be counted in this year’s GDP.
Now, I buy your second-hand bike from an auto dealer, (who gets Rs.1000 Commission) should we include it in the (C)? Hell Yes, because he sold his ‘service’ to me uniquely. Every time he sells a second hand product, although no new ‘product’ is created but new service is delivered by him.
WHAT IF SAME 1000 RUPEE NOTE IS CHANGING HANDS?

I gave a note of Rs.1000 to that dealer as part of his brokerage (dalaali) and he gives the same Rs.1000 note to the electricity company for his monthly bill.
Same Rs.1000 note is changing hands so is our GDP =Rs.1000? Nope. GDP is the money value of everything produced within India. So brokerage service is Rs.1000 separately and the electricity produced is also worth Rs.1000 separately. Therefore, Even as same 1000 rupee note is given to both parties.
Total GDP=1000 brokeage+1000 electricity bill=Rs.2000
If electri.co gives that 1000 rupee note to its peon as salary, then again it has to be counted. Because peon sold his unique service separately to the company. So in that case
Total GDP =Brokerge+Electric bill+peon^’ salary=Rs.3000

#2: Investment [I]
People investing in sharemarket, putting money in banks etc.

#3: Government spending [G]
Like buying (overpriced) sports equipment from Kalmaadi’s associates during Common wealth games. Government  paying salary to staff, buying new tanks and missiles..everything.

:Export & Import [X & M]
Money we get from export is added.
You remember that GDP means Money value of everything we produce within India. So if we import something, it has to be subtracted, because it is not produced within India.
So formula (for ease In remembering)
GDP = Consumer+Investor+Governer + (eXporter – iMporter)
Technically correct formula:

GDP(Expenditure)=C+I+G+(X-M)

#B: Income Method of counting gdp
Here you count everyone’s income. But some people may be running business in credit (udhaari), sometimes payments are delayed. So may not give the ‘full picture’ for the given year.

#C: Production method of counting gdp
Total money value of everything produced (value added at each stage)

    Farmer produced Wheat and sold 100 kg of it @ 2000 Rs. (Original value)
    Flour mill, purchased it, grinded it and sold the flour to baker @ 2500 Rs. (+500 value added to previous purchase)
    Baker made breads, cookies and biscuits and sold the total production @3500 Rs to its final customers. (+1000 value added to previous purchase)
what is total ‘GDP’ here?
2000+2500+3500=8000 Rs? Hell no! You’ve to see the value added.
So, total money value of this line is: 2000+500+1000=3500.
Not all of the wheat goes into Baker’s oven. Some of it will go in making beer, some in a normal household for making roti and so on. You’ve to track the value added in each different line.