Fiscal Deficit and its Component

What is fiscal deficit?

Source: Budget Document

 Fiscal deficit is when government’s total expenditure exceeds its receipts

(excluding borrowing).
 It indicates government’s borrowing requirement from all sources to finance
its expenditure.
 Fiscal deficit is expressed as a percent of GDP which indicates capacity of a
country to borrow in relation to what it produces. High % to GDP means government
is borrowing beyond its capacity in relation to what its producing which is its income.

Source: Budget Document

  Table below shows break up of expenditures and receipts and fiscal deficit calculation.
(` Bn) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013(BE)
1. Revenue Receipts 1814.8 1926.1 2013.1 2308.3 2638.1 3059.9 3470.8 4343.9 5418.6 5402.6 5728.1 7884.7 7669.9 9356.9
2. Tax Revenue (net to Centre) 1282.7 1366.6 1335.3 1585.4 1869.8 2248.0 2702.6 3511.8 4395.5 4433.2 4565.4 5698.7 6422.5 7710.7
3. Non-tax Revenue 532.1 559.5 677.7 722.9 768.3 811.9 768.1 832.1 1023.2 969.4 1162.8 2186.0 1247.4 1646.1
4. Capital Receipts (5+6+7) 1157.1 1341.8 1625.0 1805.3 2113.3 2003.9 1795.5 1490.0 1708.1 3437.0 4516.8 4088.6 5517.3 5552.4
5. Recoveries of Loans 101.3 120.5 164.0 341.9 671.7 620.4 106.5 58.9 51.0 61.4 86.1 124.2 142.6 116.5
6. Other Receipts 17.2 21.3 36.5 31.5 169.5 44.2 15.8 5.3 388.0 5.7 245.8 228.5 154.9 300.0
7. Borrowings and other Liabilities 1038.5 1200.1 1424.5 1431.9 1272.2 1339.2 1673.2 1425.7 1269.1 3369.9 4184.8 3735.9 5219.8 5135.9
8. Total Receipts (1+4) 2971.9 3267.9 3638.1 4113.7 4751.5 5063.8 5266.3 5833.9 7126.7 8839.6 10244.9 11973.3 13187.2 14909.3
9. Non-plan Expenditure 2218.7 2429.2 2611.2 3017.8 3489.2 3659.6 3651.0 4135.3 5075.9 6087.2 7211.0 8183.0 8921.2 9699.0
10. Plan Expenditure 761.8 826.7 1011.9 1114.7 1222.8 1322.9 1406.4 1698.6 2050.8 2752.4 3033.9 3790.3 4266.0 5210.3
11. Total Expenditure (9+10) 2980.5 3255.9 3623.1 4132.5 4712.0 4982.5 5057.4 5833.9 7126.7 8839.6 10244.9 11973.3 13187.2 14909.3
12. Fiscal Deficit 1047.2 1188.2 1409.6 1450.7 1232.7 1257.9 1464.4 1425.7 1269.1 3369.9 4184.8 3735.9 5219.8 5135.9
{11-(1+5+6)}
Source: Budget Document
 Tax revenue (net to centre) means tax revenue to government after adjusting for tax
revenue to states as around 30% of tax revenue is shared with states and 70% is
retained by central government.
 Other receipts under capital receipts is basically disinvestments.Borrowings which is part
of capital receipts is excluded while calculating fiscal deficit as it is for funding the deficit.

Government Receipts

 Chart below gives snap shot break up of government receipts and % contribution to its
sub heads.(% contribution as per data given in FY13 Budget Estimates (BE).

Goverment
Receipts

Revenue Capital
(95.7%) (excluding borrowing)
(4.3%)
Tax Non Tax
(82.4%) (17.6%) Disinvestments
Recovery
of Loans (72.0%)
Direct Tax
Indirect Tax Interest Receipts (28.0%)
(51.8%)
(48.8%) Dividends
Personal Tax
Corporate Tax Custom Duty Non Debt Capital Receipts
Excise Duty
Service Tax
  Chart below shows trend of government receipts in absolute term.

Source: Budget Document

 From both the above charts, its seen government draws its receipts primarily through tax
which is part of revenue receipts.
 Revenue receipts are operating revenue which occurs in normal course of business. Its
divided into tax and non tax revenue.
 Over the years contribution from direct tax has been increasing over indirect tax.
 Corporate tax contributes to around 66% of direct tax while excise duty contributes
around 42% to indirect tax (as per FY13 BE).
 Over the years service tax contribution towards indirect tax has been increasing from
around 4% in 2000 to 23% 2013(BE) which depicts contribution of service sector in GDP
has been increasing.
 Non Tax revenue is interest receipts, dividends or receipts through railways etc.
Government receives interest or dividends on back of its investments or loans its gives.
 Capital receipts do not occur during normal course of business. It’s when government
sells assets or borrows and is divided into debt and non debt capital receipts.
 Non debt is when government sells its assets or stakes or recovers loans which doesn’t
result into repayment of receipt while debt capital receipt are government borrowing and
is mainly incurred to fund the fiscal deficit.
 Though disinvestments shows contributing 72% towards capital receipts, to total receipts
it contributes only around 2%.
 Also when government disinvests, it does get one time amount but loses out on regular
income it receives from the companies it has stake which contributes towards it non tax
revenue receipt.
Government Expenditure

 Chart below gives snap shot break up of government expenditure and % contribution to
its sub heads.(% contribution as per data given in FY13 BE)

Goverment Expenditure

Plan Non Plan

(34.9%) (65.1%)

Revenue Capital Revenue Capital

(80.7%) (19.3%) (89.2%) (10.8%)

Interest Payments
Subsidies Defence
various Grants Loans to states etc

 India follows a plan based model of economy and therefore expenditure is divided into
revenue and capital plan and non plan expenditure.
 Plan expenditure is expense on schemes, projects which is budgeted by the government
while non plan expenditure is towards maintenance and support activities.
 Revenue expenditure is routine government expenditure and does not create any asset
for the government.
 Revenue expenditure is basically consumption expenditure of government.
 Revenue plan expenditure is expense towards various schemes and services provided
by government while non plan expense includes interest payments, subsidies, grants to
states etc.
 Interest payment forms around 37% of revenue non plan expenditure while subsidies
(major one includes food, petroleum, and fertilizer) form around 22% of non plan
expense.
 Capital expenditure creates asset for the government. It doesn’t include operating
expense and is taken as expense for investment which will reap benefits in future.
 Capital plan expense is basically expense on development related to infrastructure,
machinery etc which develops the economy as whole. Non plan part is expense on
defence, loans to states etc which will provide income and benefits to government in
future.
 Fiscal deficit on back of higher capital expenditure is not as bad as it creates assets for
the government which will in future increase its receipts. However fiscal deficit on back
of revenue expenditure is not good sign as it indicates government is using its receipts
and borrowing to finance its consumption rather than investing which in turn hurts
economic growth and adds to government debt.
 Charts below shows breakup of government expenditure on plan and non plan basis and
further plan and non plan is divided into revenue and capital expenditure on absolute
basis.

Source: Budget Document

 From above charts, it’s evident government is incurring higher revenue expense under
both plan and non plan.
 This depicts government is spending more on consumption rather than investing.