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    Unit 10 BE Budget, Budget Deficit

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    Kalpita Dhuri
    The document discusses different types of budget deficits including revenue deficit, budgetary deficit, fiscal deficit, and primary deficit. It defines each type of deficit and provides examples from India's central government budgets from 1980-1981 to 2005-2006. It also discusses deficit financing, meaning how governments can meet budget deficits through borrowing from central banks or commercial banks, and how this relates to money supply and inflation.

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    Unit 10 BE Budget, Budget Deficit

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    Kalpita Dhuri
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    The document discusses different types of budget deficits including revenue deficit, budgetary deficit, fiscal deficit, and primary deficit. It defines each type of deficit and provides examples from India's central government budgets from 1980-1981 to 2005-2006. It also discusses deficit financing, meaning how governments can meet budget deficits through borrowing from central banks or commercial banks, and how this relates to money supply and inflation.

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    Budget, Budget Deficit, (1)

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    The document discusses different types of budget deficits including revenue deficit, budgetary deficit, fiscal deficit, and primary deficit. It defines each type of deficit and provides examples from India's central government budgets from 1980-1981 to 2005-2006. It also discusses deficit financing, meaning how governments can meet budget deficits through borrowing from central banks or commercial banks, and how this relates to money supply and inflation.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    55 views12 pages

    Unit 10 BE Budget, Budget Deficit

    Uploaded by

    Kalpita Dhuri
    The document discusses different types of budget deficits including revenue deficit, budgetary deficit, fiscal deficit, and primary deficit. It defines each type of deficit and provides examples from India's central government budgets from 1980-1981 to 2005-2006. It also discusses deficit financing, meaning how governments can meet budget deficits through borrowing from central banks or commercial banks, and how this relates to money supply and inflation.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
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    of 12

    Unit 10 BE

    BUDGET, BUDGET DEFICIT


    What is a Budget Deficit ?

     Meaning ↓

    When the government expenditure exceeds revenues, the government is
    having a budget deficit. Thus the budget deficit is the excess of government
    expenditures over government receipts (income). When the government is
    running a deficit, it is spending more than it's receipts.
    Types of Budgetary Deficit

     The different types of budgetary deficit are explained in following points :-


     1. Revenue Deficit
     Revenue deficit is excess of total revenue expenditure of the government over its total revenue
    receipts. It is related to only revenue expenditure and revenue receipts of the government.
    Alternatively, the shortfall of total revenue receipts compared to total revenue expenditure is
    defined as revenue deficit.Revenue Deficit takes place when the revenue expenditure is more
    than revenue receipts. The revenue receipts come from direct & indirect taxes and also by way
    of non-tax revenue.The revenue expenditure takes place on account of administrative expenses,
    interest payment, defence expenditure & subsidies. Table below indicate revenue deficit of the
    central government of India. Revenue deficit = Total Revenue expenditure – Total Revenue
    receipts
     2. Budgetary Deficit
     Budgetary Deficit is the difference between all receipts and expenditure of the government,
    both revenue and capital. This difference is met by the net addition of the treasury bills issued
    by the RBI and drawing down of cash balances kept with the RBI. The budgetary deficit was
    called deficit financing by the government of India. This deficit adds to money supply in the
    economy and, therefore, it can be a major cause of inflationary rise in prices.Budgetary Deficit
    of central government of India was Rs. 2,576 crores in 1980-81, it went up to Rs. 11,347 crores in
    1990-91 to Rs. 13,184 crores in 1996-97.
     Budgetary deficit has not figured in union budgets since 1997-98. Since 1997-98, instead of
    budgetary deficit, Gross Fiscal Deficit (GFD) became the key indicator.
     3. Fiscal Deficit
     Fiscal deficit is defined as excess of total budget expenditure over total budget receipts excluding
    borrowings during a fiscal year. In simple words, it is amount of borrowing the government has to
    resort to meet its expenses.Fiscal Deficit is a difference between total expenditure (both revenue
    and capital) and revenue receipts plus certain non-debt capital receipts like recovery of loans,
    proceeds from disinvestment. Fiscal deficit = Total expenditure – Total receipts excluding
    borrowings = Borrowing
     In other words, fiscal deficit is equal to budgetary deficit plus governments market borrowings and
    liabilities. This concept fully reflects the indebtedness of the government and throws light on the
    extent to which the government has gone beyond its means and the ways in which it has done so. in
    1980-81, fiscal deficit was Rs. 7,733 crores. Between 1980-81 and 1990-91 it increased 5 times to
    Rs. 37,606 crores. Since the introduction of economic reforms in 1991-92, the government has tried
    to restrict the growth of fiscal deficit. As percentage of GDP fiscal deficit declined from 6.2% in
    2001-02 to 4.1% in 2005-06.
     4. Primary Deficit
     Primary deficit is defined as fiscal deficit of current year minus interest payments on previous
    borrowings. In other words whereas fiscal deficit indicates borrowing requirement inclusive of
    interest payment, primary deficit indicates borrowing requirement exclusive of interest payment
    (i.e., amount of loan).The fiscal deficit may be decomposed into primary deficit and interest
    payment. The primary deficit is obtained by deducting interest payments from the fiscal deficit.
    Thus, primary deficit is equal to fiscal deficit less interest payments. It indicates the real position
    of the government finances as it excludes the interest burden of the loans taken in the past.Primary
    deficit of the central governent of India was 16,108 crores in 1990-91, it reduced to 14,591 crores in
    2005-06. Primary deficit = Fiscal deficit – Interest payments
    Deficit financing (printing of new currency notes):

     Another measure to meet fiscal deficit is by borrowing from Reserve Bank of


    India. Government issues treasury bills which RBI buys in return for cash from
    the government. This cash is created by RBI by printing new currency notes
    against government securities. Thus, it is an easy way to raise funds but it
    carries with it adverse effects also. Its implication is that money supply
    increases in the economy creating inflationary trends and other ills that result
    from deficit financing. Therefore, deficit financing, if at all it is unavoidable,
    should be kept within safe limits.
     Deficit financing is the budgetary situation where expenditure is higher than
    the revenue. It is a practice adopted for financing the excess expenditure
    with outside resources. The expenditure revenue gap is financed by either
    printing of currency or through borrowing.
     Various indicators of deficit in the budget are: 
     Budget deficit =      total expenditure – total receipts
     Revenue deficit =    revenue expenditure – revenue receipts
     Fiscal Deficit = total expenditure – total receipts except borrowings
     Primary Deficit = Fiscal deficit- interest payments
     Effective revenue Deficit-= Revenue Deficit – grants for the creation of
    capital  assets
     Monetized Fiscal Deficit = that part of the fiscal deficit covered by borrowing
    from    the RBI.
     Meaning of Commercial Banks:
     A commercial bank is a financial institution which performs the functions of
    accepting deposits from the general public and giving loans for investment
    with the aim of earning profit.
     In fact, commercial banks, as their name suggests, axe profit-seeking
    institutions, i.e., they do banking business to earn profit.
     RBI produces money while commercial banks increase the supply of money by
    creating credit which is also treated as money creation. Commercial banks
    create credit in the form of secondary deposits.
    Credit Creation

     Creation of credit is one of the most important function of a commercial


    banks. Banks take deposits from the customers and provides loans from their
    deposits after keeping necessary reserves like cash reserves etc. Actually the
    banking system creates credit rather than a bank individually. Let us
    understand this by a simple example, Mr A puts deposit worth Rs. 1000 in X
    bank. For simplicity assume that there us reserve requirememt of 10%. X bank
    can lend Rs 900. Suppose Mr B gets this loan and deposits in his bank account
    with Bank Y. Now if forms part of deposits of Y who can lend Rs 810 from the
    deposit. This chain continues till the time money remains in banking system.
    This process is called credit creation where deposit of Rs 1000 has created
    credit more than that. The process stops at the point where money is moved
    out of banking system.
     Total deposits of a bank is of two types:
     (i) Primary deposits (initial cash deposits by the public) and (ii) Secondary
    deposits (deposits that arise due to loans given by the banks which are
    assumed to be redeposited in the bank.) Money creation by commercial banks
    is determined by two factors namely (i) Primary deposits i.e. initial cash
    deposits and (ii) Cash Reserve Ratio (CRR), i.e., minimum ratio of deposits
    which is legally compulsory for the commercial banks to keep as cash in liquid
    form. Broadly when a bank receives cash deposits from the public, it keeps a
    fraction of deposits as cash reserve (CRR) and uses the remaining amount for
    giving loans. In the process of lending money, banks are able to create credit
    through secondary deposits many times more than initial deposits (primary
    deposits).

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