Question

Read the passage below and answer the questions that follow.

When the government spends more than its income (revenue) such a situation is called budgetary deficit. It is calculated by subtracting government total income from its expenditure. The government needs to borrow money for spending beyond its earnings. A high budgetary deficit hints that the government is spending beyond its means. Persistent budgetary deficit can lead to accumulation of debt and potential inflation. Most economies of the world, including India, run into a budgetary deficit. In India budgetary deficit has been a significant concern for many years. Union Budget of India takes mainly three measures of budgetary deficit namely Fiscal Deficit, Revenue Deficit and Primary Deficit. Despite efforts to reduce budgetary deficit, all the three types of deficits remain high and continue to pose challenges for the Indian economy. During the pandemic year 2020–2021, these deficits were very high, but have gradually declined since then. Fiscal deficit, Revenue deficit and Primary deficit stood at 6.4%, 4.1% and 3.9% of GDP respectively in the year 2022–2023.

1. What is Fiscal deficit?  [2]
2. Define Revenue deficit.  [2]
3. What do you understand by Primary deficit?  [2]
4. State the implications of budgetary deficit.  [1]
5. Why was budgetary deficit high in 2020–2021?  [1]

Answer 1

1. Fiscal deficit is the excess of total budget expenditure over total receipts, excluding borrowings: Fiscal Deficit = Total Expenditure − Revenue Receipts + Capital Receipts Excluding Borrowings It is the key indicator of budgetary deficit and measures the total borrowing requirements of the government. In 2023–24, fiscal deficit was ₹16,54,643 crore, i.e., 5.6% of GDP.
2. Revenue deficit is the excess of revenue expenditure over revenue receipts: Revenue Deficit = Revenue Expenditure − Revenue Receipts It indicates that the government is spending more than its current income on day-to-day operations, which implies dissaving and the need for borrowings. In 2023–24, revenue deficit was ₹7,65,216 crore, i.e., 2.6% of GDP.
3. Primary deficit is the difference between fiscal deficit and interest payments: Primary Deficit = Fiscal Deficit − Interest Payments. It shows how much the government is borrowing to meet expenses other than interest payments and is a measure of fiscal discipline. In 2023–24, primary deficit was ₹5,90,771 crore, i.e., 2.0% of GDP.
4. Implications of budgetary deficit include: (i) increased government debt and future interest burden; (ii) inflationary pressure in the economy; (iii) reduced availability of resources for private investment; (iv) possibility of a debt trap; and (v) burden on future generations in the form of higher taxes and interest payments.
5. Budgetary deficit was high in 2020–2021 because during the Covid-19 pandemic the government’s revenue declined while public expenditure increased for relief, health and stimulus measures.