Components of Government Budget

1. Revenue Receipts

• Definition: Recurrent, non-redeemable income.
• A. Tax Revenue: Income from taxes.
• B. Non-Tax Revenue: Includes interest received on loans, dividends and profits, grants-in-aid from foreign partners.

1. Revenue Expenditure

• Definition: Expenditures that do not create physical or financial assets.
• Examples:
  • Interest payments on loans
  • Defense expenditures
  • Subsidies
  • Public administration
  • Grants to States
  • GST compensation to states

1. Capital Receipts

• Definition: Receipts that create liabilities or reduce financial assets.
• Examples:
  • Market borrowings
  • Sale of Treasury Bills (T-bills) to RBI and financial institutions
  • Recovery of loans granted by the central government
  • Loans from foreign sources
  • Disinvestment
  • Small savings (e.g., post office, provident fund)
• Note: Amount received from the public sector (profits, disinvestment) is counted under Non-Debt Capital Receipts (NIF), with allocation decided under the Annual Budget.

1. Capital Expenditure

• Definition: Expenditure that creates physical or financial assets or reduces financial liabilities.
• Examples:
  • Acquisition of land, buildings, and machinery
  • Investment in shares
  • Loans to States and PSUs
  • Repayment of loans

Government Budget and Deficit Management: Key Concepts

1. Gender Budget

• Allocation of funds and responsibilities based on gender.

1. Fiscal Consolidation

• A strategy for reducing fiscal deficits through measures like increasing taxes and reducing subsidies. Goal: To bring down the deficit without eliminating it.

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Best Ways to Fulfill Deficit Requirements

• External Aids: Borrowing from external sources (long-term, low-interest loans).
• External Borrowing: Involves foreign loans with favorable terms.
• Internal Borrowing: Borrowing from domestic markets but may lead to the crowding-out effect (displacing private sector investment).
• Printing Currency: A last resort option.

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Types of Debt

1. Internal Debt:

• Market Borrowing: Borrowing from financial markets.
• Treasury Bills (T-Bills): Short-term borrowing by the government.
• Government Securities (G-Sec): Long-term borrowing instruments.

1. External Debt:

• Borrowing from international financial institutions and foreign governments.

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Fiscal Responsibility and Budget Management (FRBM) Act

1. FRBM 2003:

• Annual fiscal targets for deficit reduction, government borrowing, and debt management.
• Prohibited primary borrowing after 2006 and inflation targeting flexibility for RBI.
• Requires quarterly reports on trends in receipts and expenditures.

1. FRBM 2013:

• Amendments to target Effective Revenue Deficit (ERD) instead of just Revenue Deficit (RD).
• Capital expenditure excluded from RD calculations.
• Aimed to eliminate ERD by 2015.

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N.K. Singh Panel Recommendations (Review of FRBM)

1. Fiscal Council:

• A 3-member body responsible for multi-year fiscal forecasts and assessments of fiscal targets.
• Advises on Escape Clause for deviations.

1. Public Debt-to-GDP Ratio:

• Target of 60% by 2022-23 (40% for the central government, 20% for states).

1. Escape Clause:

• Allows a 0.5% deviation in case of national emergencies or significant structural reforms.

1. Bouyancy Clause:

• If real output growth increases by 3%, fiscal deficit must fall by 0.5%.

1. Congruence of Fiscal and Monetary Policy:

• Interaction between inflation targeting and fiscal rules.

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Rangarajan Committee (2012)

• Key Suggestions:
• Scrap the Plan vs Non-Plan distinction: Found to be dysfunctional.
• Strengthen CPMS (Central Plan Monitoring System): Enable citizens to track fund flow.
• Shift from outputs to outcomes in public expenditure.

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Government Debt Classification

1. Public Debt: Debt contracted against the Consolidated Fund of India.

• Internal Debt: Predominantly (93%) from domestic sources.
• External Debt: Borrowed mainly from international institutions.

1. Other Liabilities:

• Liabilities under the Public Account, including NSSF (National Small Savings Fund), FCI (Food Corporation of India) borrowings, and PF (Provident Funds).

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External Debt

• Share in External Debt: As of 2003, the government’s share in total external debt was 67.7%, a decrease from 83.3% in previous years.
• Types of External Debt:
• Commercial Borrowing: Borrowing from international financial institutions.
• NRI Deposits: Money raised from Non-Resident Indians (NRIs).
• Short-term Borrowing: Loans with a short repayment period.
• Multilateral Borrowing: Loans from organizations like the World Bank and IMF.
• Bilateral Borrowing: Loans from foreign governments.
• Currencies Used:
• USD (US Dollar), INR (Indian Rupee), SDR (Special Drawing Rights), Japanese Yen, Euro.

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Masala Bond

• What it is: A financial instrument allowing Indian entities to raise funds from the overseas market in Indian Rupees.
• Benefits for Borrowers:
• Diversify funding sources.
• Lower interest rates compared to global markets.
• Shield against currency fluctuations.
• Benefits for Foreign Investors:
• Higher returns than typical global bonds.
• Optimism regarding India’s growing economy.

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Zero-Base Budgeting (ZBB)

• Definition: A method of budgeting that requires examining every program and project as if it were a new initiative each year.
• Goal:
• Ensure funds are allocated to high-priority items.
• Eliminate outdated programs.
• Reduce expenditure on low-priority items.
• Cost-Benefit Analysis is used for each program.

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Fiscal Drag

• Impact: Occurs when inflation pushes income into higher tax brackets, which can lead to a decrease in demand (also called bracket creep).
• Effect on Government:
• Increased tax buoyancy (tax revenues rise).
• Reduced growth in the economy as people have less disposable income.
• Automatic Stabilizer: It helps cool down an overheated economy by automatically increasing taxes during inflation.

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Pump Priming

• Definition: A policy where the government engages in deficit financing to fund public works projects aimed at reviving an economy in recession.
• Goal: Stimulate economic growth through government spending.

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Types of Goods

1. Public Goods:

• Non-rivalrous: Consumption by one person does not reduce availability for others (e.g., national defense, street lighting).

1. Merit Goods:

• Goods that have positive externalities (e.g., education, healthcare).

1. Demerit Goods:

• Goods that have negative externalities (e.g., tobacco, alcohol).

1. Giffen Goods:

• Demand increases as prices rise due to the lack of substitutes (e.g., rice, bajra).
• Typically considered inferior goods consumed more by lower-income groups.

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Twin Deficit

• Refers to the combination of two types of economic deficits:
• Budget Deficit: When government spending exceeds revenue.
• Current Account Deficit (CAD): When a country’s imports exceed its exports, leading to more outflow of foreign currency than inflow.

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