Budget 2023: Know What Is Revenue Deficit And How It Impacts Government Expenditure

As we inch closer to the annual Budget, set to be presented by FM Nirmala Sitharamna, let's understand one of the crucial aspects of the government’s balance sheet, the Revenue Deficit

The revenue deficit refers to the excess of the government’s revenue expenditure over revenue receipts.

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When the government spends more than it collects by way of revenue, it incurs a Budget deficit. There are various measures that capture government deficits and they have their own implications for the economy. As we inch closer to the annual Budget, set to be presented by FM Nirmala Sitharamna on February 1, let's understand one of the crucial aspects of the government’s balance sheet, revenue deficit.

What Is Revenue Deficit?

The revenue deficit refers to the excess of the government’s revenue expenditure over revenue receipts. Revenue expenditure — which refers to money needed for the day-to-day operation of government, interest payments on debt, and grants given to state governments and other parties — should be covered by revenue receipts — which consist of money earned by the government from tax revenue and non-tax revenue. If there is a shortfall in that revenue then this amount is called revenue deficit. 

This situation means that the government will have to borrow not only to finance its investment but also its consumption requirements. When a government runs a revenue deficit, it means that it is not saving and is leveraging the savings of other sectors of the economy to fund a portion of its consumption expenditure. 

Revenue deficit = Revenue expenditure – Revenue receipts

How Revenue Deficit Is Funded?

Since a significant part of revenue expenditure is committed expenditure, it must be maintained. So to fund the revenue deficit that occurred due to this imbalance in the accounts, the government can use a few measures. The government can borrow money from the markets or it can sell existing public assets. Using one of these methods means the revenue deficit is met from the capital receipts. 

On the other hand, the government can increase its non-tax or tax receipts by raising taxes or bringing more population into the tax bracket. The government could also try to reduce unnecessary expenditures.

Impact Of Revenue Deficit On Economy

A revenue deficit, if not addressed, can have a negative impact on the government's credit rating. This deficit can also jeopardize the government's projected expenditures because there isn't enough money to meet the expense. Often the government reduces productive capital expenditure or welfare expenditure. This would mean lower growth and adverse welfare implications.
The government's revenue deficit has various ramifications, including the fact that it must be satisfied through capital receipts, which require the government to borrow or sell existing assets. This results in a decrease in assets. Furthermore, If the government uses capital earnings to fulfil its consumer expenditure, inflation can also rise. With more and more such borrowings, combined with the interest, the burden to repay the liabilities grows. It can result in massive revenue deficits in the future.

Revenue Deficit And Effective Revenue Deficit 

The effective revenue deficit is the difference between the revenue deficit and grants for capital asset creation. Every year, the Center gives grant-in-aid to the state and Union Territories, and with these grants, they construct capital assets; however, this capital is not contributed to the central government's capital expenditure. As a result, an effective revenue deficit has been created to measure such expenditure. Revenue expenditures in the form of grants for capital asset creation are not included in the Effective Revenue Deficit.

The ‘effective revenue deficit’ was introduced in Budget 2012 which excludes those revenue expenditures (or transfers) in the form of grants for the creation of capital assets. Effective Revenue Deficit was established as a financial indicator in 2012-13.

Effective Revenue Deficit = Revenue Deficit - Grants in aid for capital assets

According to the definition, revenue expenditure must not result in the creation of any productive assets. This, however, poses a problem with the accounts department. The Central government distributes numerous grants to states and UTs, some of which result in assets owned by the state government rather than the union government. Some capital assets, like roads and ponds, are created through the MGNREGA programme, therefore grants for such expenditures are not technically revenue expenditures. Simply put, although being recorded as Revenue Expenditures in accounting, these expenses are related to asset creation and hence cannot be characterised as wholly "unproductive."

During the 2011-12 Budget, the Rangarajan Committee on Public Expenditure developed the idea of an effective revenue deficit in India. It was included as an extra fiscal indicator by the Finance Act of 2012, which amended the FRBM Act to lend statutory status to the notion of the effective revenue deficit.  

What Budget 2022 Says About Revenue Deficit? 

The Medium-Term Fiscal Policy Statement presented to Parliament under Section 3(2) of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, establishes three-year rolling targets for four specific fiscal indicators in relation to GDP at market prices. Revenue Deficit is one of them. 

In the Medium-Term Fiscal Policy Statement of Budget 2022, the government told the parliament that the Revenue deficit, in RE (revised estimates) 2021-22, is estimated to fall to 4.7 per cent of the GDP as against BE (Budget estimates) of 5.1 per cent pointing toward improvements in quality of public expenditure.

The revenue deficit for April-November 2021 is 38.8 per cent of BE and is much lower than the corresponding figure of 139.9 per cent in the previous year. The Revised Estimates for revenue deficits are pegged at 4.7 per cent of GDP in 2021-22, the statement said. 

"Due to the buoyant position of revenue receipts ... The Revenue Deficit during this (At the end of November 2021) period was about 38.8 per cent of BE. This is significantly lower than the corresponding figure of 140 per cent and 128 per cent at the end of the corresponding period of FY20-21 and FY19-20," the government added.

Expectation And Prediction For Budget 2023

The government estimated the revenue deficit lower at 3.8 per cent of the GDP in FY23 against 4.7 per cent of the GDP in RE 2021-22. Improved corrections in revenue deficit point towards improvements in the quality of expenditure and better revenue-capital balance in the Budget of the central government. 

The government decreased its revenue deficit forecast for FY23 to Rs 9.9 lakh crore from Rs 11.40 lakh crore in the previous fiscal year. It has been rising over the past five years, but the slight decrease appears to be positive.