Fiscal Deficit

REVENUE BUDGET AND CAPITAL BUDGET:

Before understanding fiscal deficit we should know the difference between revenue and capital flows, be they receipt or expenditure.

•  An expenditure is a capital expenditure if it relates to the creation of an asset that is likely to last for a considerable period of time. Such as expenditure for making a building is called capital expenditure because it creates an asset. Now this building can be used for creating some revenue for the government. So for the economy capital expenditure is good. Such expenditures are generally not routine in nature.
• By the same logic a capital receipt arises from the liquidation of an asset including the sale of government shares in public sector companies (disinvestment), the return of funds given on loan or the receipt of a loan. This again usually arises from a comparatively irregular event and is not routine. It means some time capital receipts are those receipts which government get occasionally and some of the receipts also increase liability such as receipt of loans. so for the economy perspective capital receipts are not good.
• In contrast, revenue expenditure are fairly regular and generally intended to meet certain routine requirements like salaries, pensions, subsidies, interest payments, and the like. It means revenue expenditures are the routine expenditure which does not create any asset. In economy's perspective increase in this kind of expenditure is not good
• Revenue receipts represent regular earnings of the govt. for instance tax receipts and non tax revenues including from sale of country's resources.

REVENUE RECEIPTS:

The term "Revenue Receipt" is made up of 2 words revenue and receipts. Every form of money generation such as income and earnings are Revenues for the Government if they don't increase the liability of Government" for example, if Government borrows money from IMF, it will increase its liabilities so cannot be called revenue.

• So, the essential thing is that Revenue is all that income that does not increase financial liability. 
• The Revenue Receipts are divided into two parts viz. Tax Revenue and Non- Tax revenue.
• The Tax revenue receipts include direct taxes and indirect taxes. The Non Tax Revenue Receipts are those revenue receipts which are  not generated by Taxing the public, These may include:
• > Money which the Government earns as "Dividends and profits"from its profit making Public Enterprises.
• > Interest which the Government earns on the money lent by it to external or internal borrowers Thus this revenue receipts may be in foreign currency as well as Indian Rupees.
• >The money which the government receives out of its fiscal services such as stamp printing, currency printing, medal printing etc.
• >Money which the Government earns from its 'General Services' such as power distribution, irrigation, banking services, insurance, and community services etc. which make the part of the Government business.
• > Money which the government accrues as fees, fines, penalties etc.
• >Grants the Government of India receives from the external sources. In case of the State Governments, it may be the internal grant from the central Government.     

REVENUE EXPENDITURE:

                     While the Revenue Receipts are those receipts of the Government of India which don't created additional liability on the Government, the Revenue Expenditure are those expenditure which don't involve creation of any productive assets. These kind of assets can be identified easily as they don't produce any assets. 

                     Normally, the revenue expenditure are used either in running of a business or the Government. For example the regular expanses of a family are the revenue expenditure.

                     Some of the revenue expenditure are:

• The interest paid by the Government of India on all the internal and external loans does not produce any assets, so it is revenue expenditure.
• The salaries and pension paid by the Govt.
• The Subsidies forwarded by the government to all sectors do not produce any productive asset, so it is revenue expenditure.
• The defense expenditure which are needed for smooth operation of the standing armed forces is revenue expenditure. However purchase of equipment produces assets, so that would be a Capital expenditure.
• The postal expenditures and deficits are Revenue expenditures.
• The money spent of maintaining the law and order situation of the country is also revenue expenditures.
• The money spent on various social services such as public health, education, poverty, alleviation, scholarships, etc. all revenue expendiures.
• The grants given by the Government of India to states and other countries is Revenue Expenditure.

REVENUE DEFICIT:

• If total Revenue Receipts is less than Total Revenue Expenditure it is called Revenue deficit. ( sidhi si baat jab regular kharcha regular income se jyada ho jaye) 
• Revenue Receipts - Revenue Expenditure < 0   --- Revenue Deficit
• Revenue Receipts - Revenue Expenditure > 0  ---- Revenue Surplus
• The Term Revenue Deficit and fiscal deficit are being used in the Government of India Budget since the Fiscal year 1997-98. 

EFFECTIVE REVENUE DEFICIT:

• When government do revenue expenditure, it gives grants, of which some grants are used for creation of capital assets. So these grants are a type of capital expenditure. So for getting a true picture of revenue deficit Government introduced effective revenue deficit in 2011 budget,
• Effective Revenue Deficit = Revenue deficit - Grants which are used for creation of Capital Assets

PRIMARY DEFICIT:

•  The revenue expenditure include the interest liabilities of the Government. If the Interest liabilities are Not included from the Revenue deficit, it is called Primary Deficit.

      Primary Deficit = Revenue Deficit - Interest Liabilities.

CAPITAL RECEIPTS:

All the non revenue receipts are known as Capital Receipts. They are under the following heads:

• Loan Recovery: The money which the Government of India had lent in the past to the States, to the PSUs and to the Union Territtories, and to the parties and the Government abroad, when recovered back, are Called Capital Receipts. Though the Loan recovery is Capital Receipt, the interest received on these loans is Revenue receipts as discussed above
• Borrowings by the Government: The Government borrows from the market sources, it borrows from inside as well as outside the country. All these borrowings are called capital receipts. The interest paid on such borrowings is placed under Revenue Expenditures.
• Other Receipts: The other receipts include the money in the PPF, Postal deposits, other small dposit schemes, sale of the Government bonds. All of them are a kind of loan which the Government needs to pay back with expenditures of interest on them.

CAPITAL EXPENDITURE:

The Capital Expenditure of the Government of India on capital items such as loans is called Capital Expenditure.

They are under several heads as follows:

• Loan Disbursals: The loans given by the Government to the states, PSUs and other governments is called Capital Expenditure.
• Loan Repayments: The loan which the Government of India had taken in the past, when are returned back are included in the capital expenditures.
• Plan Expenditures of State Government: The state plans need money from the central Government, so it is a Capital Expenditure.
• Plan Expenditures of State Government: The Planned development which creates assets is called capital expenditure.
• Capital Expenditure on Defense: The purchase of arms and equipment, modernization of the army is a Capital Expenditure.
• The money spent on Defense is non plan expenditure, it includes both the revenue and capital expenditures.
• Other Liabilities: The other liabilities include all other payment liabilities of the Government which are of non revenue nature.

FISCAL DEFICIT:

Revenue Receipt + Capital Receipt = Total Receipt

Revenue Expenditure + Capital Expenditure = Total Expenditure

The fiscal deficit indicates that the Total Receipts of the Government is less than the total Expenditure.

Fiscal deficit = Total Expenditure - (Revenue receipts + Recoveries of Loans + other Receipts) =      Borrowing and other liabilities.

[ जब देश का खर्च आमदनी से बढ़ जाये तो उसी को इंग्लिश में fiscal  deficit  कहते है। जैसे जब हमारा खर्च हमारी कमाई  से बढ़ जाता है तो हम उधर लेते है उसी तरह जब देश का खर्च देश की आमदनी से बढ़ जाता है तो देश भी उधार लेता है यही उधर fiscal  deficit  कहलाता है। ].

Concept of National Income

GROSS DOMESTIC PRODUCT:

Economy is made up of production and consumption of goods and services. Production is achieved via factors of production viz. Land, Labor and Capital. Consumption is achieved via trade, distribution and final consumption of goods & services. The goods as we know can be finished goods (final goods) or unfurnished goods. The final result of production of goods and services is "product"of an entity, we may call it Gross Product. When we combine the monetary value (value of goods in terms of money) of all goods and services produced in the domestic territory of a country for a specified time such as a year, this will be called "GROSS DOMESTIC PRODUCT".

What is domestic territory?

The domestic territory includes :

1. the political boundary as well as terrestrial water
2. ships and aircrafts operated by the residents of the country
3. fishing vessels
4. oil and natural gas rigs which may be located outside the country
5. embassies and consulates of the country located abroad

Now, as an example suppose India produces only apples and the cost of apple is Rs.50 per apple and it produce 1000 apples in a year and at the unit price of Rs.100 it produces 200 units of service then the

GDP=P*G+P*S (where p= price per unit, g=goods and s=service)

GDP=1000*50+100*200=Rs.70000

Now there are different terms regarding GDP as GDP  at Current price, GDP at Factor Cost 2004-05 prices.

GDP AT CURRENT PRICE: When GDP is estimated on the market prices it is called GDP at Current Price.

GDP AT CONSTANT PRICE: When GDP is estimated on the basis of some fixed prices prevalent at a particular point of time (a base year), it is called GDP at constant prices.

Due to Indirect Taxes the GDP at market price figure is not accurate. This is because, Market value of the Goods and services is always higher than the total cost of production, because the market prices include the Indirect taxes. So to arrive at a more accurate figure we  need to minus the Indirect taxes for the GDP at market price.But in some sector Government of India provide cash help (subsidy). So the Subsidy should be added so that we can arrive to the real value of GDP that is GDP AT FACTOR COST.

GDP AT FACTOR COST= GDP AT M.P. - INDIRECT TAXES + SUBSIDIES

GROSS NATIONAL PRODUCT:

We know that GDP is the money value of all the final goods and services produced in the domestic territory of a country in a specified time period. We must understand that domestic territory of the country does not mean only political boundary but other things such as terrestrial waters, ships and aircrafts operated by the residents of the country, fishing vessels, oil and natural rigs which may be located outside the country, embassies and consulates of the country located abroad and all of them constitute the GDP. Here we need to take some examples:

• One is Mr. Prakash Chandra Pandey, who is posted in US in a  Software Company.
• Another is Mr. John who is posted in India in Tata Power in Bangalore.
• What Mr. John is produced here is a part of GDP, but out of what he produced, he sent some money to his wife and kids at New York, United States. This is called Repatriation. We imagine that he repatriated Rs. A from India to U.S.

• What Mr. Prakash Chandra Pandey produced in US was a part of GDP of United States, but out of what he produced, he sent some money to his retired parents in Allahabad. This is also called Repatriation. We imagine the he repatriated Rs. B from US to India.

This also means that figure A minus B can be positive or negative, because any of Prakash of John can repatriate more to his country. This A minus B is called Net Factor Income From Abroad or NFIA.

In GDP figure, if we add what was repatriated to India and reduce what was repatriated out of India, then we come at a new figure which is called GROSS NATIONAL PRODUCT.

GNP=GDP+NFIA

The value of NFIA may be positive or negative. It is positive when Indians living outside the country repatriated more value and negative when foreigners living inside the country repatriated more to their country.

Net Domestic Product:

Now take a example to understand this concept. Suppose Mr. Amit has a small bakery in a shop where he has some small machines such as ovens to bake the breads. What he is producing is not a correct figure because every year his oven gets lesser in value due to use wear and tear. This loss due to wear and tear of capital goods such as building machines, equipment, tools, trucks, tractors, trains, airplanes is called Depreciation.

All tangible goods are subject to depreciation. Depreciation is also known as Consumption of the Fixed Capital.

The GDP figure is fine, but it is a Gross Figure. We can not arrive at a net figure unless we deduct what we lost in the Consumption of the Fixed Capital as Depreciation.

So when we deduct depreciation from GDP, we arrive at NDP.

NDP= GDP - depreciation.

Net National Product:

Net national product is nothing only when we add NFIA In NDP then we get NNP.

NNP= NDP + NFIA

NNP= GDP - depreciation+ NFIA

Now there are different terms such as GDP_M.P., GDP_F.C., GNP_M.P., GNP_F.C, NDP_M.P, NDP_F.C, NNP_M.P, NNP_F.C. 

Now we should understand relation between them

NNP_{F.C. =}  NNP_M.P - Indirect Tax + subsidies  =  GNP_M.P - Depreciation -Indirect taxes + subsidies  =  GDP_M.P + NFIA - Depreciation - Indirect taxes + subsidies

Whenever you want to convert Gross to Net you should Minus Depreciation from Gross such as

NDP_{M.P =} GDP_M.P. -   Depreciation

Whenever you want to convert Market Price into Factor Cost Minus Indirect tax and Add Subsidies Such as.

GDP at factor cost = GDP at market price - Indirect Tax + Subsidies.

If you want to Convert Domestic Product into National Product just add Net Factor Income From Abroad (NFIA) such as

GNP = GDP + NFIA.

In this way we can convert them.