Fiscal and Revenue Deficit

What is fiscal deficit? 
The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings needed by the government. While calculating the total revenue, borrowings are not included.

Generally fiscal deficit takes place due to either revenue deficit or a major hike in capital expenditure. Capital expenditure is incurred to create long-term assets such as factories, buildings and other development. A deficit is usually financed through borrowing from either the central bank of the country or raising money from capital markets by issuing different instruments like treasury bills and bonds.

What is the difference between fiscal deficit and primary deficit? 

Primary deficit is one of the parts of fiscal deficit. While fiscal deficit is the difference between total revenue and expenditure, primary deficit can be arrived by deducting interest payment from fiscal deficit. Interest payment is the payment that a government makes on its borrowings to the creditors.

What are the views of different experts on fiscal deficit? 

Economists differ widely on their views on fiscal deficit. According to John Maynard Keynes, a deficit prevents an economy from falling into recession, while another school of thought is that a country should not have fiscal deficit.

Many economists think that if the deficit is financed by raising debt from the central bank it may lead to an inflationary scenario. Higher fiscal deficit is one of the reasons for the Indian economy to have relatively higher inflation.

What is revenue deficit? 
A mismatch in the expected revenue and expenditure can result in revenue deficit. Revenue deficit arises when the government's actual net receipts is lower than the projected receipts. On the contrary, if the actual receipts are higher than expected one, it is termed as revenue surplus. A revenue deficit does not mean actual loss of revenue.

Let's take an hypothetical example, if a country expects a revenue receipt of Rs 100 and expenditure worth Rs 75, it can result in net revenue of Rs 25. But the actual revenue of Rs 90 is realised and an expenditure is Rs 70. This translates into net revenue of Rs 20, which is Rs 5 lesser than the budgeted net revenue and called as revenue deficit.

What is the current scenario in India? 

To revive the economy, the government has announced several stimulus packages. This has led to a hike in the fiscal deficit. The interim budget has also proposed an expenditure of Rs 953,231 crore. The Reserve Bank of India recently said that the fiscal deficit might touch 5.9% against earlier estimates of 2.5%.

This turns into a deficit of Rs 3,54,731crore from an initial expectation of Rs 1,50,310 crore. The government is expected to lose Rs 36,074 crore due to a cut in taxes.