This article throws light upon the six main concepts of government deficits. The concepts are: 1. Budgetary Deficit (BD) 2. Monetized Fiscal Deficit (MFD) 3. Gross Fiscal Deficit (GFD) 4. Net Fiscal Deficit (NFD) 5. Gross Primary Deficit (GPD) 6. Net Primary Deficit (NPD).
Government Deficit: Concept # 1. Budgetary Deficit:
In India, the budget deficit is measured as the difference between all receipts and expenditure in revenue plus capital accounts. This budgetary gap is usually financed by issuing 91 days treasury bills and running down on the governments cash balances with treasuries and RBI.
Therefore this traditional budgetary deficits is equal to the sum total of net addition to treasury bills issued by the government and drawn upon from its cash balance.
This budgetary deficit (BD) can be measured as:
BD = (RE + CE + NDL) – (RR + G + DB + FB)
= TB + CB, Where
RE = Revenue expenditure
CE = Capital expenditure
NDL = Net Domestic Lending
RR = Revenue Receipts
G = Grants
DB = Domestic borrowing excluding 91 days treasury bills
FB = Foreign borrowings
IB= 91 days treasury bills
CB = Govt. cash balances with treasuries and RBI.
However this is an extremely narrow concept, which reflects only a part of the resource gap in current fiscal operations.
Government Deficit: Concept # 2. Monetized Fiscal Deficits (MFD):
The traditional concept of budgetary deficit doesn’t take into account the amount of new issues of govt. securities, which is undertaken by the Reserve Bank when adequate response from the public and financial institutions including banks is lacking.
The Chakravarthy Committee Report (1985) therefore recommended that the government deficits should be measured in terms of change in Reserve Bank credit to government which is a meaning full measure of the monetary impact of fiscal operations.
It is a fact that R.B.I, credit to government gives the full picture of the impact of fiscal operation on changes in the reserve money and the potentiality of changes in money supply. Therefore the term monetized fiscal deficit is coined in this respect.
Monetized Fiscal deficit = Change in Reserve Bank credit to government.
In symbolic terms
MFD = TB + GS held by the R.B.I.
Where GS = dated government securities.
Thus the concept of monetized fiscal deficit means the increase in net RBI credit to the central government. This concept is broader than the conventional measure of budget deficit, but it is useful in analyzing the monetary impact of fiscal operation.
Government Deficit: Concept # 3. Gross Fiscal Deficit (GFD):
The Gross Fiscal Deficit represents the overall borrowing requirement of the government. It is measured as the difference between government expenditure and net lending on the one hand and current revenue and grants on the other.
GFD = (RE + CE + NDL) – (RR + G)
= FB + DB + TB + CB GFD is a comprehensive measure of macroeconomic imbalance. It reflects the overall resource gap in fiscal operations.
Government Deficit: Concept # 4. Net Fiscal Deficit (NFD):
In the federation like India the Central government, extensively lends out of its borrowings to the state and local governments and public sector enterprises. In this case the concept of net fiscal deficit is more important. Net Fiscal Deficit is derived by deducting from gross fiscal deficit, the net domestic lending.
NFD = GFD – NDL = (RE + CE) – (RE + G)
However in the lending operations, International Monetary fund make use of the concept of Fiscal deficit, without making a distinction between gross and net fiscal deficit.
Government Deficit: Concept # 5. Gross Primary Deficit (GPD):
Primary deficit is essentially a non-interest deficit. Gross primary deficit is measured as:
GPD = GDF – NIE, where NIE stands for net interest expenditure (i.e., total interest payments/expenditure minus interest earnings by the government.).
Government Deficit: Concept # 6. Net Primary Deficit (NPD):
Net Primary deficit is measured as NPD = NDF – NIE It should be noted that primary deficit is a good indicator of the indebtedness of the government under current fiscal operations. It is an important index to check the debt trap situation.
What is needed is that the government should take earnest efforts to reduce the volume of revenue deficit, which is inflationary in character. This can be done by scaling down non-plan outlays.