Budget Deficits for CUET Economics

About 5 min to learn · 51 questions

Revenue deficit, fiscal deficit and primary deficit: how each is measured, what each tells us, worked calculations from a budget table, and what large deficits do to debt, interest payments and prices, with the traps CUET sets.

Syllabus area: Introductory Macroeconomics

On this page · 8 sections

01The core idea
02The three formulas
03Reading the deficits
04What large deficits do
05Exam shortcuts
06Common mistakes
07Quick revision
08Check your understanding

The core idea

Three deficits answer three questions. Is day-to-day spending paid for by revenue? (Revenue deficit.) How much must the government borrow this year? (Fiscal deficit.) How much of that borrowing is for this year's own policies, apart from interest on old debt? (Primary deficit.)

The three formulas

Deficits

\text{RD} = \text{Revenue expenditure} - \text{Revenue receipts}

\text{FD} = \text{Total expenditure} - (\text{Revenue receipts} + \text{Non-debt capital receipts}) = \text{Borrowing}

\text{PD} = \text{FD} - \text{Interest payments}

Non-debt capital receipts are recovery of loans and disinvestment. Borrowing is never subtracted: it is what the fiscal deficit measures.

Example 1 · From a budget table

Revenue expenditure 2,000 (of which interest 450), capital expenditure 700, revenue receipts 1,600, recovery of loans 50, disinvestment 100 (₹ crore).

RD = 2,000 − 1,600 = 400.
Total expenditure = 2,700; non-debt receipts = 1,600 + 50 + 100 = 1,750; FD = 2,700 − 1,750 = 950.
PD = 950 − 450 = 500.

Answer

RD ₹400 crore, FD ₹950 crore, PD ₹500 crore

How are they linked?

The link

\text{FD} = \text{RD} + \text{Capital expenditure} - \text{Non-debt capital receipts}

So the revenue deficit is part of the fiscal deficit. A rise in capital expenditure raises FD but leaves RD unchanged.

Watch out

Interest is already inside revenue expenditure. Do not add it again for the revenue deficit; subtract it only to get the primary deficit.

Reading the deficits

Deficit	What it tells us
Revenue deficit	The government is borrowing to pay for spending that creates no assets: dissaving
Fiscal deficit	Total borrowing needed this year
Primary deficit	Borrowing needed apart from interest on past debt
Primary deficit = 0	All borrowing goes to pay interest
Primary deficit < 0	A primary surplus: interest exceeds the fiscal deficit

Deficits are usually reported as a share of GDP: a fiscal deficit of ₹6 lakh crore with GDP of ₹200 lakh crore is 3% of GDP.

What large deficits do

Debt and interest: each deficit adds to debt, and more debt means more interest next year. Borrowing mainly to pay interest is a debt trap.
Crowding out: government borrowing uses savings that firms could have borrowed, and can push up interest rates.
Inflation: borrowing from the RBI, paid for with new money, raises money supply.
Not always harmful: borrowing for roads and ports can raise future output and revenue.

The FRBM Act, 2003, sets targets for bringing deficits and debt down. For India's central government, interest payments are the largest single item of revenue expenditure.

Exam shortcuts

FD = borrowing.
PD = FD − interest; FD = PD + interest.
Revenue surplus = negative revenue deficit.
Capital spending changes FD, not RD.

Common mistakes

Subtracting borrowings when finding FD.
Forgetting non-debt capital receipts.
Subtracting interest from the revenue deficit to get PD.
Adding interest to revenue expenditure a second time.

Quick revision

Formulas

RD = revenue expenditure − revenue receipts
FD = total expenditure − (revenue receipts + non-debt capital receipts)
PD = FD − interest

Meaning

FD = borrowing; RD = borrowing for consumption
PD shows this year's policies
Large deficits: debt, interest, crowding out, inflation

Transactions with the rest of the world are recorded in the balance of payments.

Next · 07Quick revision

Check your understanding

51 questions, grouped by type, easy to hard. Pick an answer and check it. The worked solution opens when you ask for it.

Revenue deficitQ1 of 51Q1

Revenue deficit

8 questions

Item	₹ crore
Revenue expenditure	2,000
of which interest payments	450
Capital expenditure	700
Revenue receipts	1,600
Recovery of loans	50
Disinvestment	100

List I	List II
A. Revenue deficit	I. ₹500 crore
B. Fiscal deficit	II. ₹400 crore
C. Primary deficit	III. ₹2,700 crore
D. Total expenditure	IV. ₹950 crore

Item	₹ crore
Tax revenue	3,200
Non-tax revenue	800
Revenue expenditure	4,600
of which interest payments	1,000
Capital expenditure	1,400
Recovery of loans	100
Disinvestment	200

List I	List II
A. Revenue deficit	I. Total borrowing needed in the year
B. Fiscal deficit	II. Revenue is more than enough for day-to-day spending
C. Primary deficit	III. Borrowing used for day-to-day spending
D. Revenue surplus	IV. Borrowing needed apart from interest on past debt

Check your understanding

Revenue deficit

Question 1

Question 2

Question 3

Question 4

Question 5

Question 6

Question 7

Question 8

Fiscal deficit

Question 9

Question 10

Question 11

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Question 13

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Question 15

Question 16

Question 17

Question 18

Question 19

Primary deficit

Question 20

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Question 22

Question 23

Question 24

Question 25

Question 26

Question 27

Question 28

Question 29

Calculating the deficits

Question 30

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What deficits do

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Question 51