The first and the most important figure economists and all analysts look at while analyzing the budget is the fiscal deficit (FD) as a percent of GDP. For FY20, FD has been revised up sharply from 3.3% to 3.8%, a result of significantly lower revenue mop-up. For FY21 also, it is projected to remain high at 3.5%. Other than that, budget also throws up other deficit numbers such as\u00a0primary deficit, revenue deficit and effective revenue deficit! So, what all are these deficits and their importance?? Here is a brief look.<\/p>\n
Fiscal deficit (FD) is the highest of the deficit which is the difference between the sum total of all receipt minus all expenditure from government\u2019s accounts. The difference is what government has to secure as borrowings from different sources keep itself going. FD has high significance because this determines the amount of money government borrows from the market. Since total money available in the market is limited (equal to the savings generated), high FD reduces the amount available for private investment. (However, there is no empirical evidence for this phenomenon called \u201ccrowding out\u201d. For instance, in the current year, government is projected to borrow Rs 50,000 crore more than its initial estimates. Yet, banks are flush with funds as there is no demand for private investment). For FY21, budget projects total expenses of Rs 30.4 lakh crore against receipt of Rs 22.4 lakh crore leaving a fiscal deficit of Rs 8 lakh crore.\u00a0However, not all of this has to be borrowed from the market as government also mobilizes significant amount of money through National Small Savings Funds (NSSF), Provident fund etc. In fact, high interest rate being offered in these schemes lead to market distortions as these acts as benchmark for banks\u2019 deposit rates. Higher deposit rate reduces banks\u2019 ability to bring down their lending rates also.<\/p>\n
Against the total borrowings needs of Rs 8 lakh crore, government is expected to borrow Rs 5.4 lakh crore from the market, up from Rs 5 lakh crore in FY20. It would be receiving Rs 2.4 lakh crore from NSSF, same as FY20. After reducing its external debt considerably after 1991, government has been resorting to this although the amount is marginal. For FY20, it is mobilizing Rs 4,900 crore of external debt against budget estimates of reduction by Rs 2,900 crore. For FY21, it remains nearly same at Rs 4,600 crore.<\/p>\n
The next in the budget statement is revenue deficit (RD) which is the difference between revenue receipt and revenue expenditure. Thus, it removes capital items – both on the receipt and expenditure side since these are investments and are expected to provide benefits in future. The logic behind the number is to understand whether government is able to finance its recurring\/non-asset creating expenditure from its recurring earnings or not. The FRBM Act stipulates that RD should come down to below 1% in the medium term. For FY21, RD is projected at Rs 6.1 lakh crore, sharp increase from Rs 5 lakh crore in FY20. RD is projected at 2.7% of GDP, against 2.4% in FY20. It may be noted that even though FD, as a percent of GDP, is projected to come down in FY21, RD would increase.<\/p>\n
However, central government also provides significant amount of money to state government, Rs 2.1 lakh crore for FY21, for creation of capital assets. These are classified as revenue as per the existing norms but are adding to the productive capacity of the economy. (While government has been attempting to quantify the gains from these investments, greater effort needs to be put to determine this more comprehensively and plan future projects accordingly). To take this into account, a new number was introduced about a decade ago called effective revenue deficit (ERD). ERD is projected at Rs 4 lakh crore or about 1.8% of GDP, up from 1.5% in FY20.<\/p>\n
The final item in the deficit terminologies is primary deficit (PD), the most dangerous of all and the source of what is called “debt trap”. It is equal to total receipt minus total expenditure except interest payments. If this number is negative, it means government is borrowing to meet its interest obligation. Logic of the number is that while government can justify its borrowings as needed to service the past debt, running a primary deficit means that it is not able to meet even its current expenses from its revenues. This puts higher stress on long term finances of the government. FRBM Act stipulates that governments should not be running any primary deficit. Yet, governments have not been able to achieve that, with the deficit being as high as 3.2% of GDP in FY10. For the current year, PD has risen to Rs 1.4 lakh crore, equal to 0.7% of GDP, up from Rs 67,000 crore in FY19. Even though the figure is projected to come down to Rs 88,000 crore, or 0.4% of GDP in FY21, it is imperative that the figure become zero soon.<\/p>\n
Trivia – Greece, at the peak of its crisis in 2009, ran a primary deficit at over 10% of its GDP.<\/p>\n","protected":false},"excerpt":{"rendered":"
The first and the most important figure economists and all analysts look at while analyzing the budget is the fiscal deficit (FD) as a percent of GDP. For FY20, FD has been revised up sharply from 3.3% to 3.8%, a result of significantly lower revenue mop-up. For FY21 also, it is projected to remain high […]<\/p>\n","protected":false},"author":8,"featured_media":13998,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[857],"tags":[],"class_list":["post-14002","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economy","membership-content","access-restricted"],"yoast_head":"\n