Deficit-Various types of deficit


Deficit

Deficit is the difference between expenditure and receipt. Deficit is classified as follows

Surplus

Its the opposite of deficit. Surplus occurs when the receipt(income) is more than expenditure. The extra money left in the hands of the spending authority(Govt) is the surplus amount. Surplus never happens because there's always need for more expenditure no matter how much the earning is.

Budget Deficit

Budget deficit considers only the difference between the total budgeted receipts and the expenditure. It was abolished.

Budget Deficit=Total Expenditure(T.Ex)-Total Receipts(T.Re)

Fiscal Deficit(FD)

It is the difference between total expenditure and total receipts except borrowing and other liabilities.

FD= T.Ex-[T.Re-(borrowing and other liabilities)]

Monetised deficit(MD)

Monetised deficit is the borrowings made from the RBI through printing fresh currency. It is an increase in the net RBI credit to the Union Govt. It can also be seen as money expansion process by RBI.

Primary deficit

It is measured by subtracting interest payments from Fiscal Deficit. It is an important parameter to define the efforts of government in Fiscal responsibility and discipline.

Revenue Deficit(RD)

Revenue deficit is the difference between the revenue receipts(RR) on tax and non-tax sides and the revenue expenditure(RE). Revenue expenditure is synonymous with consumption and non-development, in general.

RD=RE-RR

Effective Revenue Deficit(ERD)

Effective revenue deficit has been defined as the difference between “the revenue deficit and the grants for creation of capital assets”. It has been prescribed by an amendment to the FRBM Act by the Finance Act, 2012.

Grants for creation of capital assets are defined as “the grants-in-aid given by the Central Government to the State Governments, constitutional authorities or bodies, autonomous bodies and other scheme implementing agencies for creation of capital assets”. The amendment sought to eliminate effective revenue deficit by 2015.

ERD is not a constitutional term and Fourteenth finance commission has suggested that the ERD be eliminated as it creates accounting problem and raises the moral hazard issue of creative budgeting.

What happens if too much money is borrowed form the market?

Crowding out happens as a result of excessive borrowing by the government. Borrowing above a certain amount from the market may be inflationary because it lowers the supply thus relatively increasing the demand.

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