DEFICITS

DEFICIT

With Greece’s economic crises news going all around on the social platform, the word which emerges the most in these types of situations is ‘DEFICIT’. It seems more of an economic term. But we all in our daily life deal with the concept of this word.

Deficit, in a simple sense means that your expenditures is more than your revenues.

But just like the economy it is also a complex scenario to be dealt with.

The deficits which are normally associated with an economy and its working are –

1.       Revenue Deficit

2.       Fiscal Deficit

3.       Primary Deficit

4.       Capital Deficit

5.       Monetized Deficit

Now let us have a bird’s eye view of each if these different types of deficits stated above:-

1.      Revenue Deficit-

Total Revenue Expenditure –Total Revenue Receipts

This happens when government’s own earnings are not sufficient to meet normal functioning of different departments and for provision of services. The deficit is met by capital receipts ie through borrowings or sale of assets (disinvestment). Higher deficit gives a warning to the government either to curtail its expenditure or increase its tax and non tax receipts.

2.      Fiscal Deficit –

Total Expenditure – Total Receipts (excluding borrowings)

It is the amount of borrowing which the government has to resort to meet its expenses. It includes both revenue as well as capital components. The borrowings taken to deal with it may leads to debt trap as it increases the interest liability which increases revenue expenditure leading to higher revenue deficit. Deficit financing can be an option but may lead to inflationary pressures. Reduce expenditure and subsidies, increase tax base, disinvestment are some of the options to deal with this deficit.

3.      Primary Deficit –

Fiscal Deficit (of current year)  –  interest payment (of previous year borrowing)

                                                              

It shows the actual in hand amount of government borrowing is required to meet expenses other than interest payment.

In other words, where fiscal deficit indicates the amount of borrowing requirement inclusive of interest payment, primary deficit indicates borrowing requirement exclusive of interest payment.

4.      Capital Deficit –

Expenditure on Capital Ac  -  Capital Receipts

The excess of capital disbursements over capital receipts measures the capital deficit.

5.       Monetized Deficit

It indicates the level of support extended by Reserve Bank to government borrowing programme.

SAMIR DEWAN

Editor at CHARTERED BLOOD