Why are there fiscal and revenue deficits in India?



What’s fiscal balance?

Fiscal balance is the difference between a government’s revenues—without including borrowings—and expenditures. If expenditures exceed revenues, then there’s a deficit. If revenues exceed expenditures, then there’s a surplus. There can be a rare situation where the revenues and expenditures are equal. This is known as a balanced budget.

Fiscal balance is an important indicator for assessing an economy’s health. For growing economies, a fiscal deficit is expected. During the growth phase, a government is expected to spend on infrastructure and facilities. It will generate revenue later. However, a persisting or widening deficit is a red flag regarding a nation’s economic health.

Indias fiscal and revenue deficits

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The revenue deficit

Another indicator that’s watched closely is revenue deficit. A revenue deficit occurs when an entity receives a net amount that’s less than the budgeted amount that was expected.

During the annual budget exercise, the government presents projected revenue amounts and expenditures for the year. When the actual amount—revenue expenditure minus revenue receipts—is lower than the projected amount, a deficit occurs. Revenue deficit is concerning for a government. A deficit means that the government is receiving less revenue than it should or it’s spending too much.

There’s a difference between revenue deficit and fiscal deficit. For revenue deficit, only revenue expenditure and revenue receipts are calculated. To calculate fiscal deficit, total expenditure—including revenue expenditure—and revenue receipts plus capital receipts—without borrowings and other liabilities—are considered.

Capital receipts refer to the money that’s received as loan and from the sale of fixed assets, shares, and debentures. Meanwhile, revenue receipts refer to money received from the conduct of regular business—for example, money received from selling goods and services.

Fiscal and revenue deficit announcements impact Indian stocks. This will impact your investments in exchange-traded funds (or ETFs) like the WisdomTree India Earnings Fund (EPI), the iShares MSCI India ETF (INDA), the iShares S&P India Nifty 50 Index Fund (INDY), the PowerShares India Portfolio (PIN), and the iPath MSCI India Index ETN (INP).

In the next part of this series, we’ll discuss how India spends its revenues. We’ll also discuss how it generates revenues.


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