- Revenue Deficit: It refers to the excess of total revenue expenditure of the government over its total revenue receipts. Revenue deficit = Total Revenue expenditure – Total Revenue receipts. OR Revenue deficit = Total Revenue expenditure – (Tax Revenue + Non-Tax Revenue)
- Fiscal Deficit: Fiscal deficit is defined as excess of total expenditure over total receipts excluding borrowings during a fiscal year. Fiscal deficit = Total budget expenditure – Total budget receipts excluding borrowings OR Fiscal Deficit = (Revenue expenditure + Capital expenditure) – (Revenue Receipts + Capital receipts excluding borrowings) Fiscal deficit shows the borrowing requirements of the govt. during the budget year. Fiscal deficit reflects the borrowing requirements of the govt. for financing the expenditure including interest payments. Fiscal deficit = Revenue expenditure + capital expenditure – Revenue receipts – capital Receipts excluding borrowings OR Fiscal deficit = Revenue expenditure + capital expenditure – Tax Revenue – Non-Tax Revenue – recovery of loans – disinvestment OR Fiscal deficit = Total borrowing requirement of the government
- Fiscal deficit indicates the additional number of financial resources needed to meet government expenditure.
- it is an indicator of the increase in future liabilities of the government on interest payment and loan repayment. The government has to pay back the borrowed amount with interest in future. Consequently, the government has to either borrow more from the people or tax people more in future to pay interest and loan amount.
- Primary Deficit: Primary deficit is defined as fiscal deficit minus interest payments on previous borrowings. Primary deficit shows the borrowing requirements of the govt. for meeting expenditure excluding interest payment. Gross Primary deficit = Fiscal deficit – Interest payments
Net Primary deficit = Fiscal deficit + Interest received – Interest payments It shows the total amount that the central government needs to borrow.
Three Ways to Finance Deficit
There are three ways by which the central government finances deficit. These are:
(a) Borrowing from Public and Foreign Governments
(b) Withdrawing Cash Balances held with the Reserve Bank of India (R.B.I.)
(c) Borrowing from the Reserve Bank of India (R.B.I)
The Government ordinarily prefers to borrow either from its citizens or from foreign governments instead of withdrawing cash balances held with the R.B.I. or borrowing from it. The latter two ways to finance deficit increase the supply of money. The increase in supply of money increases the prices in an economy. On the other hand, borrowing domestically from public has no effect on the supply of money and consequently on prices because when government borrows, the money held by people is transferred to government with no change in the supply of money. However, the money supply would increase when government borrows from foreign countries. The last two ways to finance deficit increase the supply of money. Any money that flows out of the R.B.I. increases the supply of money in economy and increases the prices in domestic economy