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Deficit Measurement in India

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There are different measures of deficits in macroeconomics and each type of deficit measure carries a different macroeconomic meaning. The broad measures of deficit (which have been and/or are being) reported by the government in India, may be classified, either in terms of the ‘nature of transactions[1] or on the basis of the ‘means of financing’ them.

The chart below elucidates a list of different types of deficits that have been and are being used in India.

Deficit Measurement in India.jpg

I. Meaning of different measures of deficit

(a) Fiscal Deficit Gross Fiscal Deficit is defined as the excess of total expenditure of the government over the total non-debt creating receipts.

Fiscal deficit can be either ‘gross’ or ‘net’. The Central government makes capital disbursements as loans to the different segments of the economy. In the developing countries, a large part goes as loans to other sectors-States and local Governments, public sector enterprises and the like. Net fiscal deficit can be arrived at by deducting net domestic lending from gross fiscal deficit .


(b) Budget Deficit Also referred to as simply ‘budget deficit’ is that part of the government’s deficit which is financed through short-term borrowings. These short-term borrowings may be from the RBI or from other sources.

Normally, short-term borrowings from the RBI are through the net issuance of short-term treasury bills (that is, ad-hoc and ordinary[2] treasury bills) and by running-down the central government’s cash balances held by the RBI.

(c) Monetized deficit Also known as the ‘net reserve bank credit to the government’, it is that part of the government deficit which is financed solely by borrowing from the RBI.

Since borrowings from the RBI can be both short-term and long-term, therefore, monetized deficit is the sum of the net issuance of short-term treasury bills, dated securities (that is, long-term borrowing from the RBI) and rupee coins held exclusively by the RBI, net of Government’s deposits with the RBI.

This is different from the Traditional Budget deficit in two ways-

  1. Traditional Budget deficit includes 91-day treasury bills held by both, the RBI and non-RBI entities whereas Monetized deficit includes 91-day Treasury Bills held only by the RBI.
  2. Traditional Budget deficit includes only short-term sources of finance whereas Monetized deficit includes long-term securities also.
Short-term sources of finance.jpg

(d) Primary Deficit Gross Primary deficit is defined as gross fiscal deficit minus net interest payments. Net primary deficit, is gross primary deficit minus net domestic lending.

(e) Revenue deficit Revenue deficit is defined as the difference between revenue expenditure and revenue receipts. For a detailed exposition click here

(f) Effective revenue Deficit Introduced in 2011-12, it is defined as revenue deficit minus that revenue expenditure (in the form of grants), which goes into the creation of Capital Assets. For a detailed exposition click here

Interest Payment1.jpg

(g) Other measures of deficit Apart from these, there are various other types of measures of deficit that are widely used internationally, like the Consolidated Public Sector Deficit, which is the excess of expenditure over revenue for all the government entities; Operational Deficit, which is the ‘inflation-corrected’ deficit and is defined as Consolidated Public Sector Deficit minus inflation rate times the debt stock; Structural deficit which removes the effects of temporary movements in the variables from their long-run values, thereby providing an idea of the long-run position of the country after removing the impact of temporary shocks; and others.


II. Significance of different measures of deficit

S.No Deficit Measure Significance
1 Fiscal Deficit

Widely used as a summary indicator of the macroeconomic impact of the budget in several industrialized countries. This measure has been adopted by the IMF as the principal policy target in their programmes. In India, the government began to report the fiscal deficit only after 1991.

    Since the shortfall in receipts over expenditure must be covered through borrowing, therefore, Gross Fiscal Deficit, gives the overall borrowing requirements of the government over a given financial year. And thus shows the net addition to the level of public debt during a financial year.
2 Budget Deficit

In the presence of the system of automatic monetization of deficits through issuance of ad-hoc treasury bills, this measure of deficit, becomes an important target to keep in check.

However, in the year 1997, the government discontinued the issuance of ad-hoc and tap treasury bills. As a result of this, now, the concept of budget deficit in the traditional sense has lost its significance in public finance and is now not reported in the Budget documents of the Government of India.

3 Monetized Deficits Monetization of deficits, which increases the money supply, is inflationary if the rate of growth of money supply is greater than the rate of increase of the demand for cash balances arising from the growth of the economy. Thus, monetized deficits are an important indicator of the inflationary impact of the increase in government’s budgetary deficits.
4 Primary Deficits It excludes the burden of the past debt and shows the net increase in the government’s indebtedness due to the current year’s fiscal operations. A reduction in primary deficit is reflective of government’s efforts at bridging the fiscal gap during a financial year.
5 Revenue Deficit A positive revenue deficit implies that the government is resorting to borrowing to finance current consumption.
     


Also See

1. The most important and the broadest classification of government transactions is between current (revenue) and capital expenditure. Generally understood, revenue (current) expenditures are those which do not result in the creation of physical or financial assets. This includes expenditure on wages and salaries and, commodities and services for current use. Capital expenditures, on the other hand, are those which affect the net wealth or debt position of the government. For example purchase of a building adds to the government’s assets and is thus capital in nature. Likewise, repayment of debt reduces the government’s financial liability and is therefore capital in nature.

2. Ad-hoc treasury bills are not sold to the general public and are not marketable whereas ordinary bills are freely marketable and are sold to the public and banks.


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