The most important and the first number economists and all analysts look at while analyzing the budget is the fiscal deficit as a percent of GDP. The figure, revised marginally up from 3.3% to 3.4% for FY19, is projected to be maintained at 3.4% for 2019-20 also. However, other than that, budget also throws up other deficit numbers such as primary deficit, revenue deficit and effective revenue deficit..! So what all are these deficits and their importance?? Here is a brief look.Fiscal deficit (FD) is the highest of the deficit which is the difference between the sum total of all receipt minus the total expenditure from the government accounts. The difference is what government has to borrow to keep itself going. FD has high significance because this determines the amount of money government borrows from the market. Since total money available to be lent out in the market is limited (equal to the savings generated), high FD leads to ‘crowding out” of private investment. For FY20, budget projects total expenses of Rs 27.8 lakh crore against a receipt of Rs 20.8 lakh crore leaving a fiscal deficit of Rs 7 lakh crore. However, not all of this has to be borrowed from the market as government also receives significant amount as loan from National Small Savings Funds (NSSF), provident fund, internal debt & public account etc. Against the total borrowings needs of Rs 7 lakh crore, government is expected to borrow only Rs 4.5 lakh crore from the market, same as in FY19, the rest being met from these off-market resources. A positive trend is that government is gradually paying-off its external debt reducing the eternal vulnerability. Against initial estimate of Rs 2,600 crore, government is expected to reduce its external debt by Rs 4,900 crore in FY19 and Rs 2,900 crore in FY20.
The next in the budget statement is revenue deficit (RD) which is the difference between revenue receipt and revenue expenditure. Thus, it removes capital items – both on the receipt and expenditure side since those are investments and are expected to provide benefits in future. (While government has been attempting to quantify the gains from these investments, greater effort needs to be put to determine this more comprehensively and plan future projects accordingly). The logic behind the number is to understand whether government is able to finance its recurring/non-asset creating expenditure from its recurring earnings or not. The FRBM Act stipulates that RD should come down to below 1% in the medium term. For FY20, RD is projected at Rs 4.7 lakh crore or 2.2% of GDP, same as in FY19 but lower than 2.6% in FY18. However, there are a number of expenditures such as expenditure on rural road, rural houses etc which are classified as revenue as per the existing norms but are in the nature of capital investment. To address this anomaly, a new number was introduced about a decade ago called effective revenue deficit (ERD). ERD is projected at Rs 2.7 lakh crore or about 1.3% of GDP, up from 1.1% in FY19. Increase in this number is a result of greater outlay on income support scheme but not a good sign.
The final item in the deficit terminologies is primary deficit (PD), the most dangerous of all and the source of what is called “debt trap”. Numerically, it is equal to fiscal deficit minus interest payments or money that government borrows to meet its regular expenditure in addition to meeting the interest obligations. Logic of the number is that while government can justify its borrowings as needed to service the past debts, running a primary deficit means that it is not able to meet even its current expenses from its revenues and hence putting a higher stress on the long term finances of the government. PD is projected to come down to Rs 39,000 crore in FY20, down from Rs 47,000 crore in FY19 and Rs 62,000 crore in FY18. As a percent of GDP, it is projected at 0.2% in FY20, down from 0.7% in FY16 and as much as 3.2% in FY09..! Greece, at the peak of the crisis in 2009 ran a PD at over 10% of its GDP!