CDS (I) 2021 General Knowledge · Question 27 of 120

Correct — B, fiscal deficit. The stem is the standard definition almost word for word: fiscal deficit is the difference between the government's total expenditure and its total receipts excluding borrowing. Written out, the gross fiscal deficit equals total expenditure minus the sum of revenue receipts and non-debt creating capital receipts, where non-debt creating capital receipts are things such as recoveries of loans and proceeds from the sale of public sector undertakings — receipts that do not themselves create a liability. The three words 'excluding borrowings' are the whole point of the measure. If borrowing were counted as a receipt the books would always balance, because a government finances whatever it does not otherwise fund by borrowing. Leaving borrowing out turns the number into a statement of how much the government must borrow, which is why the fiscal deficit is read as the total borrowing requirement and, from the financing side, equals net borrowing at home plus borrowing from the Reserve Bank plus borrowing from abroad.

• (a)primary deficit — One step further along. The primary deficit is the fiscal deficit minus interest payments, and it exists to show the imbalance created by the current year's decisions once the inherited burden of past debt is set aside. It is a smaller number than the fiscal deficit whenever interest is being paid at all.
• (c)Current deficit — Not a term of Indian budget accounting. The nearest real concepts are the revenue deficit, which is the excess of revenue expenditure over revenue receipts, and the current account deficit, which belongs to the balance of payments and has nothing to do with the budget.
• (d)capital deficit — Also not a budget term. The budget separates a revenue account from a capital account, and deficits are defined on the revenue side and on the aggregate, but no measure called a capital deficit is published.

The Union budget reports several deficits because each answers a different question. The revenue deficit compares revenue expenditure with revenue receipts and shows whether the government is borrowing to meet its running costs. The fiscal deficit compares total expenditure with all receipts other than borrowing and shows how much must be borrowed in all. The primary deficit strips interest payments out of the fiscal deficit and shows the imbalance attributable to this year rather than to accumulated debt. A large revenue deficit inside the fiscal deficit is the warning sign, because it means borrowed money is going into consumption rather than into assets.

Two of the options are real measures and two are invented, so the item can be halved immediately by anyone who knows the published set — revenue, fiscal and primary. Choosing between the two real ones is then a matter of reading the stem for what has been subtracted: nothing here has been taken out for interest, so it is the fiscal deficit and not the primary. Anchoring to the exam, the number was extraordinary at that moment. The budget presented in February 2021 put the fiscal deficit for 2020-21 at 9.5 per cent of GDP, far above the usual band, because of the collapse in receipts and the extra spending of the pandemic year, with a stated path back towards 4.5 per cent by 2025-26.

• Fiscal deficit is the difference between the government's total expenditure and its total receipts excluding borrowing.
• Gross fiscal deficit equals total expenditure minus revenue receipts and non-debt creating capital receipts.
• Non-debt creating capital receipts include recoveries of loans and proceeds from the sale of public sector undertakings.
• The fiscal deficit indicates the government's total borrowing requirement, financed by net borrowing at home, borrowing from the Reserve Bank and borrowing from abroad.
• Primary deficit equals the gross fiscal deficit minus net interest liabilities.
• Revenue deficit is the excess of revenue expenditure over revenue receipts, and is a part of the fiscal deficit.

• Confusing the fiscal deficit with the primary deficit; interest payments are the difference.
• Mixing the budget's revenue deficit with the balance of payments' current account deficit.
• Forgetting that borrowing is deliberately excluded from receipts, which is what gives the measure meaning.

As a define-the-deficit item, as a match-the-following pairing each deficit with its formula, or as a small numerical asking for one deficit given the others.

• practice — not a real PYQ

  If a government's fiscal deficit is Rs 50,000 crore and its interest payments are Rs 12,000 crore, its primary deficit is

  • (a)Rs 62,000 crore
  • (b)Rs 50,000 crore
  • (c)Rs 38,000 crore
  • (d)Rs 12,000 crore

  Answer(c) Rs 38,000 crore — the primary deficit is the fiscal deficit less interest payments, so 50,000 minus 12,000.

• practice — not a real PYQ

  Which one of the following is a non-debt creating capital receipt of the Government?

  • (a)Market borrowing through dated securities
  • (b)Proceeds from the sale of a public sector undertaking
  • (c)Ways and means advances from the Reserve Bank
  • (d)External commercial borrowing

  Answer(b) proceeds from the sale of a public sector undertaking — it brings in money without creating a liability, unlike the three borrowing routes.