INDEX

S. NO TOPIC PAGE NUMBER

1 INTRODUCTION 4

2 OBJECTIVES OF BUDGET 5

3 IMPORTANCE OF BUDGET 7

4 COMPONENTS OF BUDGET 7

5 UNION BUDGET OF INDIA (2020-21) 15

6 MEASURES OF GOVERNMENT DEFICIT 24

7 CASE STUDY- FISCAL DEFICIT OF INDIA 27

8 CONCLUSION 28

4
 INTRODUCTION
A government budget is an annual statement presenting the revenues and spending for a
financial year that is often passed by the legislature, approved by the chief executive or
president and presented by the Finance Minister to the nation. The budget is also known as the
Annual Financial Statement of the country.
Government budgets are of the following types:

 Union Budget: The union budget is the budget prepared by the central government for
the country as a whole.
 State Budget: In countries like India, there is a federal system of government thus every
state prepares its own budget.
 Plan Budget: It is a document showing the budgetary provisions for important projects,
programs and schemes included in the central plan of the country. It also provides
central assistance to states and union territories.
 Performance Budget: The central ministries and departments dealing with development
activities prepare performance budgets, which are circulated to members of parliament.
These performance budgets present the main projects, programs and activities of the
government in the light of specific objectives and previous years budgets and
achievements
 Zero-based Budget: This is defined as the budgetary process which requires each
ministry/department to justify its entire budget in detail. It is a system of budget in
which all government expenditures must be justified for each new period.

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5
Objectives of Budget
Government budget is a statement of expected receipts and expenditure of the government
during a fiscal year. Main objectives of the government budget are:
A) Redistribution of income and wealth
 It is one off the most important objective of government budget. The government
imposes heavy taxation on a high-income group and redistribute it
among the people of weaker section in the society.
 The government can provide subsidies and other amenities to people
whose income levels are low. These increase their disposable income,
and this reduces the inequalities.
 Progressive income tax rate is an example of how government collects more taxes from
the rich and spends the money for welfare of the poor.

B) Reallocation of Resources
 Reallocation of resources in the manner such that there is a balance between the goals
of profit maximization and social welfare.
 Government uses budgetary policy to allocate resources. This is
done imposing higher rate of taxation on goods whose
production is to be discouraged and subsidies provided on
goods whose production is to be promoted.
 There are some goods and services in which the private sector
shows little interest due to huge investment required and lower
profits, like sanitation, roads, parks, etc.
 Government can undertake the production of these goods and services. Alternatively, it
can encourage private sector by giving tax concessions and subsidies.

C) Economic Growth
 Another purpose of the government budget today is to study the generation of savings,
investment, consumption, and capital formation to assess the trend of growth in the
economy to improve the standard of living of the people.
 Economic growth implies a sustained increase in real GDP of the economy, i.e., a
sustained increase in volume of goods and services. Public welfare is the main guide.

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 D) Managing Public Enterprises
 In the budget government can make various provisions to manage the public sector
enterprises and also provides them financial help.
 Public enterprises are generally encouraged in the areas of natural monopolies like
water, railways etc. The nation regulates these departments to prevent monopolistic
tendencies which lower social welfare

E) Economic Stability
 The government of the country is always committed to save the economy from business
cycles.
 Government budget is a tool to prevent economy from inflation or deflation and to
maintain economic stability.
 The overall level of employment and prices in the economy depends upon the level of
aggregate demand during the time of deflation, deficit budgetary policy is used to
maintain stability in the economy.

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OBJECTIVES OF
BUDGET

7
 Importance of Budget

(a) Today every country aims at its economic growth to improve living standard of its
people. Besides, there are many other problems such as poverty, unemployment,
inequalities in incomes and wealth etc. Government strives hard to solve these problems
through budgetary measures.
(b) The budget shows the fiscal policy. Item wise estimates of expenditure discloses how
much and on what items, the government is going to spend. Similarly, item wise details of
government receipts indicate the sources from where the government intends to get
money to finance the expenditure.
c) In this way budget is the most important instrument in hands of governments to achieve
their objectives and there lies the importance of the government budget.

Components of Government Budget

There is a constitutional requirement in India (Article 112) to present before the Parliament a
statement of estimated receipts and expenditures of the government in respect of every
financial year which runs from 1 April to 31 March. This ‘Annual Financial Statement’
constitutes the main budget document. Further, the budget must distinguish expenditure on
the revenue account from other expenditures.
Therefore, the budget comprises of the:
(i) Revenue Budget
(ii) Capital Budget

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 Government Budget

Revenue Budget Capital Budget

Revenue Revenue Capital Capital Receipt

Expenditure Receipts Expenditure

Tax Revenue Non-Tax

Revenue

Direct Tax Indirect Tax

Revenue Budget
 The Revenue Budget comprises revenue receipts and expenditure met from these
revenues. The revenue receipts include both tax revenue (like income tax, excise duty)
and non-tax revenue (like interest receipts, profits).

Revenue Receipts
Revenue receipts are those receipts that do not lead to a claim on the government. They are
therefore termed non-redeemable. They are divided into tax and non-tax revenues.
 Tax Revenue
o Tax revenues, an important component of revenue receipts, have for long been
divided into direct taxes (personal income tax) and firms (corporation tax), and
indirect taxes like excise taxes (duties levied on goods produced within the
country), customs duties (taxes imposed on goods imported into and exported
out of India) and service tax .

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 Direct Tax
 Direct tax is imposed directly on the taxpayer and is paid by the taxpayer directly to
the government.
 The incidence and impact of the tax is on the same person.
 Its burden cannot be transferred to another person.
 It doesn't affect the prices.
 For example - Income tax, property tax etc.
 Direct taxes like wealth tax, gift tax and estate duty (now abolished) have never brought
in large amount of revenue and thus have been referred to as ‘paper taxes.’
 The redistribution objective is sought to be achieved through progressive income
taxation, in which higher the income, higher is the tax rate.
 Firms are taxed on a proportional basis, where the tax rate is a particular proportion of
profits.
 With respect to excise taxes, necessities of life are exempted or taxed at low rates,
comforts and semi-luxuries are moderately taxed, and luxuries, tobacco and petroleum
products are taxed heavily.

Direct Tax

Indirect Tax

 Indirect tax is tax collected by intermediaries (for e.g. retailers) from the ultimate
taxpayer i.e. consumers. The incidence and impact of the tax is on different persons.
 Its burden can be shifted from one person to another. For e.g. manufacturer shifts the
burden of tax to retailers who in turn shift it to consumers.
 Indirect tax may affect prices, as generally consumers pay high prices which are inclusive
of taxes.

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 Indirect Tax

 Non-tax Revenue

o Non-tax revenue of the central government mainly consists of interest receipts

on account of loans by the central government, dividends and profits on
investments made by the government, fees and other receipts for services
rendered by the government. Cash grants-in-aid from foreign countries and
international organizations are also included. The estimates of revenue receipts
take into account the effects of tax proposals made in the Finance Bill. It consists
of commercial and administrative revenue.

Commercial Revenue (Profit and interest):

 It is the revenue received by the government by selling the goods and services produced
by the government agencies. For example, profit of public sector undertakings like
Railways, BHEL, LIC etc.
 Government gives loan to State Government, union territories, private enterprises and
to general public and earns interest receipts from these loans.
 It also includes interest and dividends on investments made by the government.

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 Administrative Revenue
The revenue that arises on account of the administrative function of the government. This
includes:

 Fee: Fee refers to a payment made to the government for the services that
it renders to the citizens. Such services are generally in public interest and
fees are paid by those, who receive such services. For example, passport
fees, court fees, school fees in government schools.

 License Fee: License fee is a payment to grant a permission by a government authority.

For example, registration fee for an automobile.

 Fines and penalties for an infringement of a law, i.e., they are imposed on law breakers.

 Special Assessment: Sometimes government undertakes developmental activities by

which value of nearby property appreciates, which leads to increase in wealth. So, it is
the payment made by owners of those properties whose value has appreciated. For
example, if value of a property near a metro station has increased, then a part of
developmental expenditure made by government is recovered from owners of such
property. This is the value of special assessment.

 Forfeitures are in the form of penalties imposed by courts that a person needs to pay in
the court of law for failing to comply with court orders.

 Escheat refers to the claim of the government on the property of a person who dies
without having any legal heir or without leaving a will.

 External grants: Government receives financial help in the form of grants, gifts from
foreign governments and international organizations (IMF, World Bank). Such grants and
gifts are received during national crisis such as earthquakes, flood, war etc.

Revenue Expenditure
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  Revenue Expenditure is expenditure incurred for purposes other than the creation of
physical or financial assets of the central government. It relates to those expenses
incurred for the normal functioning of the government departments and various
services, interest payments on debt incurred by the government, and grants given to
state governments and other parties (even though some of the grants may be meant for
creation of assets). Usually expenditures that do not result in the creations of assets or
reduction in liabilities are considered revenue expenditure.

Budget documents classify total expenditure into plan and non-plan expenditure.

 According to this classification, plan revenue

expenditure relates to central Plans (the Five-Year
Plans) and central assistance for State and Union
Territory plans.
 Non-plan expenditure, the more important component
of revenue expenditure, covers a vast range of general,
economic and social services of the government.
 The main items of non-plan expenditure are interest payments, defence services,
subsidies, salaries and pensions.
 Interest payments on market loans, external loans and from various reserve funds
constitute the single largest component of non-plan revenue expenditure.
 Defence expenditure, is committed expenditure in the sense that given the national
security concerns, there exists little scope for drastic reduction.
 Subsidies are an important policy instrument which aim at increasing welfare. Apart
from providing implicit subsidies through under-pricing of public goods and services like
education and health, the government also extends subsidies explicitly on items such as
exports, interest on loans, food and fertilisers.
 Service Tax, a tax on services like telephone services, stock brokers, health clubs, beauty
parlours, dry cleaning services etc. introduced in 1994-95 to correct the disparity in
taxation between goods and services, has become a buoyant source of revenue in
recent years.

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Capital Budget

Capital budget consist of capital receipts (like borrowing, disinvestment) and long period capital
expenditure (creation of asset, investment). It is an account of assets and liabilities of the
government which takes into consideration changes in capital.
Capital Receipts

 All those receipts of the government which create liability or reduce financial assets are
termed as capital receipts. E.g., market borrowing, recovery of loan, etc.
 The main items of capital receipts are loans raised by the government from the public
which are called market borrowings, borrowing by the government from the Reserve
Bank and commercial banks and other financial institutions through the sale of treasury
bills, loans received from foreign governments and international organisations, and
recoveries of loans granted by the central government.

(A) Two examples of Capital Receipts which create liability (Debt creating) are Borrowing and
raising of funds from Public Provident Fund and Small savings deposits.

(i) Borrowings are treated capital receipts because they create liability of returning loans

(ii) Similarly, funds raised from PPF, small saving deposits in post offices and banks are treated
capital receipts because they Increase liability of the government to repay these amounts to
PPF (Public Provident Fund) holders and small savings depositors.

(B) Two examples of Capital Receipts which reduce assets are Disinvestment and Recovery of
loans. ( Non Debt Creating)

(i) Disinvestment by government means selling a part or whole of

its shares of public sector undertakings (e.g., HMT, LIC, and FCI).
Funds raised from disinvestment reduce government assets.

(ii) Recovery of loan is also capital receipt as It reduces government assets. For instance, If UP
government, which has taken loan of Rs 100 crore from Central government,
repays Rs 20 crore, value of Central government assets of Rs 100 crore is now
reduced to Rs 80 crore because of partial recovery of loan.

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Capital Expenditure

Capital expenditure refers to the expenditure which either creates an asset or causes a

reduction in the liabilities of the government.

1. It is non-recurring in nature

2. It adds to capital stock of the economy and increases its productivity through expenditure on

long period development programmers, like Metro or Flyover.

3. Examples: Loan to states and Union Territories, expenditure on building roads, flyovers.

Factories, purchase of machinery etc., repayment of borrowings, etc.

Expenditure is a capital expenditure, if it satisfies any one of the following two conditions:

(i) The expenditure must create an asset for the government. For example, Construction of

Metro is a capital expenditure as it leads to creation of an asset. However, any amount paid as

salaries is not a capital expenditure as there is no increase in the assets.

(ii) The expenditure must cause a decrease in the liabilities. For example, repayment of
borrowings is a capital expenditure as it leads to a reduction in the liabilities of the government.

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 THE UNION BUDGET OF INDIA (2020-2021)

The Union Budget of India for 2020–2021  was presented by the Finance Minister, Nirmala
Sitharaman on 1 February 2020, as her second budget. This is the second budget of Narendra
Modi led NDA government's second term.
The central ideas of the Budget are - "Aspirational India, Economic
development, A Caring Society." These three broad themes are connected
by governance that is corruption free and a financial sector that is clean
and sound.
At 2 hours and 41 minutes, the budget speech was the longest ever
delivered by a Finance Minister of India. Nirmala Sitharaman is also only
the second woman to present the budget for a second time after Indira
Gandhi.
The Union budget in 2020 was presented in a backdrop of a slowing down
of the Indian economy with estimated GDP growth for 2019-20 being at an 11-year low of
5%. Factors such as the IL&FS (shadow banker, NBFC) crisis contributed to the slowdown; as
well as international financial markets issues such as the China - US trade war. 

Budget Highlights 

 Expenditure:  The government proposes to spend Rs 30,42,230 crore in 2020-21,

which is 12.7% higher than the revised estimate of 2019-20.
 
 Receipts:  The receipts (other than net borrowings) are expected to increase by
16.3% to Rs 22,45,893 crore, owing to higher estimated revenue from
disinvestments.  
 
 GDP growth:  The government has assumed a nominal GDP growth rate of 10% (i.e.,
real growth plus inflation) in 2020-21.  The nominal growth estimate for 2019-20
was 12%.
 
 Deficits:  Revenue deficit is targeted at 2.7% of GDP, which is higher than the revised
estimate of 2.4% in 2019-20.  Fiscal deficit is targeted at 3.5% of GDP, lower than the
revised estimate of 3.8% in 2019-20

 Ministry allocations:  Among the top 13 ministries with the highest allocations, the
highest percentage increase is observed in the Ministry of Communications (129%),
followed by the Ministry of Agriculture and Farmers’ Welfare (30%) and the Ministry
of Home Affairs (20%).

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 Reactions
Reaction to the budget was mixed-to-positive.
Political
 Prime minister Narendra Modi made a statement saying that the budget has both
"vision and action".
 Among the opposition members, P. Chidambaram, the former Union Finance Minister of
India, said that the "government has given up on reviving economy". Also, with
reference to the budget allocation for Jammu and
Kashmir and Ladakh, Chidambaram also said that money can't replace freedom.
 Rahul Gandhi criticized the budget for not providing any real solution to solve
the unemployment issue.
 Sitaram Yechury of CPI(M) said that the budget does nothing to rid "people's miseries".
 Mamata Banerjee said that she was "shocked and appalled" with the government’s plan
related to the heritage of the country.
 T. M. Thomas Isaac, the finance minister of Kerala said the budget was a "war cry"
against the state; this was because the budget for the state had been reduced.

Experts

 Moody's Investors Service has said that the "budget highlights the challenges to fiscal
consolidation".
 PWCs noted that there were "some positives from a tax perspective".
 NASSCOM also reaffirms this and notes that the tax harassment for taxpayers was
something the government was committed to remove.
 Head of Research at Geojit Financial Services, rated the Budget 'below par'.
 Swaminathan Aiyer called the budget "reasonable".
 Satish Reddy said that the budget showed the continued focus of the government's in
healthcare.

Stock Markets

 As the Union budget was presented in the parliament, Nifty fell by over 3% (373.95

points) while Sensex fell by more than 2% (1000 points).
 Economic Times reports some reasons for this including lack of sops for the automobile
or real estate, confusion over new income tax slabs, high divestment targets
(₹210,000 crore (US$29 billion)) and abolition of dividend distribution tax.

17
Highlights

Union Budget 2020-2021 has three broad themes:

 Aspirational India: Better standards of living with access to

health, education and better jobs for all sections of the society.
There are three components of Aspirational India:
o Agriculture, Irrigation, and Rural Development.
o Wellness, Water, and Sanitation.
o Education and Skills
 Economic Development for all: “Sabka Saath, Sabka Vikas, Sabka
Vishwas”.
 Caring Society: Both humane and compassionate; Antyodaya as an article of faith.

These three broad themes are held together by “Corruption free, policy-driven Good
Governance” and “Clean and sound financial sector”.

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ASPIRATIONAL INDIA
Agriculture, Irrigation, and Rural Development

 Total Allocation: 2.83 lakh crore. Out of which, Rs. 1.60 lakh crore has been allocated
for Agriculture, Irrigation & allied activities and Rs. 1.23 lakh crore for Rural
development & Panchayati Raj.
 Agriculture credit, which means a type of financing in the form of credit or loans for
agricultural producers, introduced.

 Blue Economy:

1 lakh crore fisheries’ exports to be achieved by 2024-25.

200 lakh tonnes fish production targeted by 2022-23.

 Kisan Rail to be setup by Indian Railways through Public Private Partnership (PPP) to
build a seamless national cold supply chain for perishables (milk, meat, fish, etc.) and it
will comprise refrigerated coaches in Express and Freight trains.
 Krishi Udaan to be launched by the Ministry of Civil Aviation on international and
national routes to transport perishable goods to less accessible areas such as the north-
east and tribal districts.

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  Jaivik Kheti Portal – online national organic products market to be strengthened.
 Zero-Budget Natural Farming, which was mentioned in 2019 Budget, is a farming
practice that believes in natural growth
of crops without adding any fertilizers
and pesticides or any other foreign
elements, to be included.
 Integrated Farming Systems in rain-fed
areas to be expanded.
 Pradhan Mantri Kisan Urja Suraksha
evam Utthaan Mahabhiyan (PM-
KUSUM) to be expanded under which
20 lakh farmers to be provided for
INTEGRATED FARMING SYSTEM
setting up stand-alone solar pumps.
Another 15 lakh farmers to be helped to solarize their grid-connected pump sets. The
scheme enables farmers to set up solar power generation capacity on their
fallow/barren lands and to sell it to the grid.
 Village Storage Scheme to be run by the Self-Help Groups (SHGs) to provide farmers a
good holding capacity and reduce their logistics cost. Women, SHGs can regain their
position as Dhaanya Lakshmi.
 Livestock:

Doubling of milk processing capacity to 108 million MT from 53.5 million MT by 2025.

Artificial insemination to be increased to 70% from the present 30%.

 Deen Dayal Antyodaya Yojana – 0.5 crore households mobilized with 58 lakh SHGs for
poverty alleviation.

Wellness, water and sanitation

 Rs. 69,000 crores allocated for overall Healthcare sector.

 PM Jan Arogya Yojana: Rs. 6400 crores (out of Rs. 69,000 crore) has been allocated for
PMJAY.
 More than 20,000 hospitals already empanelled under PMJAY.
 Jan Aushadhi Kendra Scheme to offer 2000 medicines and 300 surgical in all districts by
2024.
 TB Harega Desh Jeetega campaign launched in order to end Tuberculosis by 2025.
 Jal Jeevan Mission (which was aimed to provide piped water supply to all households)

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  3.60 lakh crore to be approved (out of which Rs. 11,500 crores for FY 2020-21).
 Cities with million-plus population to be encouraged to achieve the objective during the
current year itself.
 Swachh Bharat Mission:

Rs. 12,300 crores to be allocated for this scheme in 2020-21.

 Commitment to Open Defecation Free (ODF)-Plus in order to

sustain ODF behaviour.
 Emphasis on liquid and greywater management.
 Focus on Solid-waste collection, source segregation, and processing.
Education and skills

 Rs. 99,300 crores for education sector and Rs. 3000 crores for skill development in 2020-
21.
 New Education Policy to be announced soon.
 National Police University and National Forensic Science University proposed for
policing science, forensic science, and cyber-forensics.
 Degree level full-fledged online education program to be provided by top-100
institutions in the National Institutional Ranking Framework (NIRF).
 Up to 1-year internship to fresh engineers to be provided by Urban Local Bodies.
 Special bridge courses to be designed by the Ministries of Health, and Skill Development
in order to fulfil the demand for teachers, nurses, para-medical staff and care-givers
abroad and to bring in equivalence in the skill sets of the workforce and employers’
standards.
 Apprenticeship embedded degree/diploma courses to be provided by 150 higher
educational institutions by March 2021.
 External Commercial Borrowings (ECBs) and Foreign Direct Investment (FDI) to be
enabled for education sector.
 Ind-SAT Exam is proposed for Asian and African countries as a part of Study
in India

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ECONOMIC DEVELOPMENT

Industry, Commerce and Investment

 27,300 crores allocated for FY21 for development and promotion of Industry and
Commerce.
 In order to provide “end to end” facilitation and support to investors and to work
through a portal, Investment Clearance Cell is proposed to be set up.
 Five new smart cities proposed to be developed on the pattern of Gujarat International
Finance Tec-City (GIFT) of Gandhinagar with dedicated metro corridors, energy-
conserving buildings, walkability elements, state-of-the-art design elements and
automated garbage collection.
 National Technical Textiles Mission to be set up with four-year implementation period
from 2020-21 to 2023-24 at an estimated outlay of Rs 1480 crore to position India as a
global leader in Technical Textiles.
 The new export credit insurance scheme, NIRVIK (Niryat Rin
Vikas Yojana), offering lower premiums for small exporters,
higher insurance cover and faster claim settlement, will be
implemented in FY2020-21.
 Scheme for Revision of duties and taxes on exported products
to be launched. Exporters to be digitally refunded duties and
taxes levied at the Central, State and local levels, which are
otherwise not exempted or refunded.
 All Ministries to issue quality standard orders as per Prime
Minister’s vision of “Zero Defect-Zero Effect” manufacturing.
 Infrastructure

 100 lakh crores to be invested on infrastructure over the next 5 years.

 National Infrastructure Pipeline (NIP) will enable a forward outlook
on infrastructure projects which will create jobs, improve ease of
living, and provide equitable access to infrastructure for all, thereby
making growth more inclusive. NIP includes economic and social
infrastructure projects. More than 6500 projects across sectors to be
classified as per their size and stage of development. 
 A National Logistics Policy, aimed at promoting seamless movement
of goods across the country and reducing high transaction cost of
traders, to be released soon to clarify roles of the Union Government, State
Governments and key regulators.
 A single window e-logistics market is proposed to be created.

21
Indian Railways:

 Large solar power capacity to be set up alongside rail tracks,

on land owned by railways.
 Four station re-development projects and operation of 150
passenger trains through PPP.
 More Tejas-type trains to connect iconic tourist destinations.
 High speed train between Mumbai and Ahmedabad to be
actively pursued.
 Bengaluru Suburban transport project, 148-km long, at a cost of Rs 18600 crore, to
have fares on metro model. Central Government to provide 20% of equity and facilitate
external assistance up to 60% of the project cost.
Power:

 22, 000 crore proposed for power and renewable energy sector in 2020-
21.
 National gas grid to be expanded from the present 16200 km to 27000
km.
 Further reforms to facilitate transparent price discovery and ease of transactions.
New Economy

 Policy to enable private sector to build Data Centre parks throughout the country to be

unveiled soon.
 Fibre to the Home (FTTH) connections through Bharatnet to link 100,000 Gram
Panchayats this year. Rs.6000 crore proposed for Bharatnet programme in 2020-21.
 8000 crore proposed over five years for National Mission on Quantum Technologies
and Applications.

Data Centre Parks FTTH

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CARING SOCIETY

 Allocation of Rs. 35,600 crores for nutrition-related programmes proposed for the FY21.

 28, 600 crores proposed for women specific programs.
 85,000 crores proposed for welfare of Scheduled Castes and Other Backward Classes in
FY21.
 53, 700 crores provided to further development and welfare of Scheduled Tribes.
 Enhanced allocation of Rs. 9,500 crores provided for Senior citizens and Divyang in
FY21.
Culture & Tourism

 Rs. 3150 crores proposed for Ministry of Culture in FY 2020-21, while Rs. 2500 crore are
allocated for tourism promotion.
 An Indian Institute of Heritage and Conservation under
Ministry of Culture is proposed with the status of a deemed
University.
 5 archaeological sites to be developed as iconic sites with
on-site Museums: Rakhigarhi (Haryana), Hastinapur (Uttar
Pradesh), Shivsagar (Assam), Dholavira (Gujarat),
Adichanallur (Tamil Nadu).
 Maritime museum to be set up at Lothal- the Harappan age maritime site near
Ahmedabad, by Ministry of Shipping.
 State governments expected to develop a roadmap for certain identified
destinations and formulate financial plans during 2021 against which specified grants to
be made available to the States in 2020-21.
Environment & Climate Change

 Allocation for Environment & Climate Change is Rs.4400 crore for FY21.
 Proposal to close the running old thermal power plants with carbon emission above the
pre-set norms.
 States that are formulating and implementing plans for
ensuring cleaner air in cities above one million to be
encouraged.
 PM launched Coalition for Disaster Resilient Infrastructure
(CDRI) with Secretariat in Delhi. This is second such international initiative after
International Solar Alliance (ISA).

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23
 Budget Deficit
The government may spend an amount equal to the revenue it collects. This is known as a
balanced budget. If it needs to incur higher expenditure, it will have to raise the amount
through taxes in order to keep the budget balanced. When tax collection exceeds the required
expenditure, the budget is said to be in surplus. However, the most common feature is the
situation when expenditure exceeds revenue. This is when the government runs a budget
deficit. There are three kinds of deficit:

 Revenue deficit
 Fiscal deficit and
 Primary deficit

Measures of Government Deficit

When a government spends more than it collects by way of revenue, it incurs a budget deficit.
There are various measures that capture government deficit and they have their own
implications for the economy

1. Revenue Deficit

Revenue Deficit: The revenue deficit refers to the excess of government’s revenue
expenditure over revenue receipts.

Revenue deficit = Revenue expenditure – Revenue receipts

 The revenue deficit includes only such transactions that affect the current
income and expenditure of the government.
 When the government incurs a revenue deficit, it implies that the government is
dissaving and is using up the savings of the other sectors of the economy to
finance a part of its consumption expenditure.
 This situation means that the government will have to borrow not only to
finance its investment but also its consumption requirements.
 This will lead to a buildup of stock of debt and interest liabilities and force the
government, eventually, to cut expenditure.
 Since a major part of revenue expenditure is committed expenditure, it cannot
be reduced.
 Often the government reduces productive capital expenditure or welfare
expenditure. This would mean lower growth and adverse welfare implications.

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2. Fiscal Deficit
Fiscal Deficit: Fiscal deficit is the difference between the government’s total
expenditure and its total receipts excluding borrowing
Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating
capital receipts)

 Non-debt creating capital receipts are those receipts which are not
borrowings and, therefore, do not give rise to debt. Examples are recovery of
loans and the proceeds from the sale of PSUs.
 The fiscal deficit, therefore turn out to be 3.4 per cent of GDP. The fiscal
deficit will have to be financed through borrowing.
 Thus, it indicates the total borrowing requirements of the government from
all sources.
From the financing side:
Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing
from abroad

 Net borrowing at home includes that directly borrowed from the public
through debt instruments (for example, the various small savings schemes)
and indirectly from commercial banks through Statutory Liquidity Ratio (SLR).
 The gross fiscal deficit is a key variable in judging the financial health of the
public sector and the stability of the economy. From the way gross fiscal
deficit is measured as given above, it can be seen that revenue deficit is a
part of fiscal deficit (Fiscal Deficit = Revenue Deficit + Capital Expenditure -
non-debt creating capital receipts).
 A large share of revenue deficit in fiscal deficit indicated that a large part of
borrowing is being used to meet its consumption expenditure needs rather
than investment.

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 3. Primary Deficit

Primary Deficit: Must note that the borrowing requirement of the government
includes interest obligations on accumulated debt. The goal of measuring primary
deficit is to focus on present fiscal imbalances.

 To obtain an estimate of borrowing on account of current expenditures

exceeding revenues, we need to calculate what has been called the primary
deficit.
 It is simply the fiscal deficit minus the interest payments
Gross primary deficit = Gross fiscal deficit – Net interest liabilities

 Net interest liabilities consist of interest payments minus interest receipts by

the government on net domestic lending.
 It is generally used as a basic measure of fiscal irresponsibility.

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CASE STUDY: FISCAL DEFICIT- INDIA

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The government had pegged the fiscal deficit for 2020-21 at Rs 7.96 lakh crore or 3.5 per cent
of the GDP in the Budget which was presented by Finance Minister Nirmala Sitharaman in
February. The country’s fiscal deficit during the first quarter of this fiscal widened to Rs 6.62
lakh crore or 83.2 per cent of the budget estimates, mainly on account of poor tax collections
due to the coronavirus lockdown, as per data by the Controller General of Accounts (CGA).
Fiscal deficit during the corresponding period of last year was 61.4 per cent of the budget
estimates.

As per the CGA data, the government’s revenue receipts stood at Rs 1,50,008 crore or 7.4 per
cent of the budget estimates (BE). During the same period of the last fiscal, the realisation was
14.5 per cent of the BE. Tax revenue stood at Rs 1,34,822 crore or 8.2 per cent of BE during the
first three months of the fiscal. During the first quarter of the last fiscal, the tax revenue was
15.2 per cent of the BE. Total receipts of the government amounted to 6.8 per cent of the BE or
Rs 1,53,581 crore.
In the budget, the government had estimated the total receipts for the fiscal at Rs 22.45 lakh
crore. The government’s total expenditure stood at Rs 8,15,944 lakh crore or 26.8 per cent of
the BE at end-June. During the same period of the last fiscal, the total expenditure was 25.9 per
cent of the BE. Out of the total revenue expenditure, Rs 1,60,493 crore was on account of
interest payments, while major subsidies accounted for Rs 78,964 crore.

A fiscal stimulus dose is needed to revive the growth rate of the economy. The stimulus size will
be calculated by the constraints on debt servicing, borrowing capacity and Indian sovereign
rating concerns. A downgrade will raise borrowing costs not only for government, but also for
private sector; this could cause a freeze in the portfolio funds which track indices passively and
has been flowing into India. In addition, such a freeze can strain the exchange rate of the rupee,
which could drop abruptly. The possibility of a sudden cessation or reversal of foreign flows is
serious, and our fiscal managers cannot neglect it. That is the price you pay for being not able
to pay, in your own currency, for imports. It is undeniable that foreign inflows are required, at
least to pay for capital goods and imported oil.
As India’s fiscal space is at a risk, it can also be assisted with easier monetary policy. Monetary
policy must maintain a loosening or easing bias, given the economy’s cyclical weakness, at least
till the predicted recovery takes hold.  
To be effective or successful in fiscal policy, it must be counter-cyclical, so a larger deficit in a
year like a recession is all right. Every valuable additional fiscal rupee must result in a boost in
consumption and growth immediately. The tax on capital gains ought not be abandoned, as
stock market being at a high, as these are progressive direct taxes. Because Google, Apple,
Microsoft, Amazon and Facebook, five of the world’s most successful entities, in India have a
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huge customer base, a digital tax should be imposed. The GST rate must be rationalized. This
could give the fiscal buck, a greater turnout than a reduction in the individual income tax, which
is borne only by about 3% of the population. This should be followed by a base expansion. The
compensation formula provided to states for their failures in GST collections could be revised,
as they too should bear some of the fiscal pain. 
______________________________________________________________________________

Conclusion
A government budget is an annual statement presenting the revenues and spending for a
financial year that is often passed by the legislature, approved by the chief executive or
president and presented by the Finance Minister to the nation. The budget is also known as the
Annual Financial Statement of the country.
Objectives of the budget are:
A) Redistribution of income and wealth
B) Reallocation of Resources
C) Economic Growth
D) Managing Public Enterprises
E) Economic Stability
A strong economy is a clear sign of development and implementation of policy for making a
better use of natural resources as well as human resources which results in future growth and
prosperity. These strong policies will be proved as best weapons against the effects of future
problems. Some of those policies will refine the past reforms. The challenges to improve the
economic growth will find solutions.

Bibliography

 www.indiabudget.gov.in
 economictimes.indiatimes.com/budget
 tradingeconomics.com/india/government-budget
 yahoo answers
 www.extramarks.com

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