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Fiscal Policy & Budget: Deficits, Revenue vs Capital Expenditure

Introduction

Fiscal Policy refers to the government's use of taxation and spending to influence the economy. The Annual Financial Statement (Budget) is defined in Article 112.

1. Components of Budget

• Revenue Budget: Day-to-day items. Does not create assets or reduce liabilities.
  • Receipts: Tax (GST, Income Tax), Non-Tax (Dividends).
  • Expenditure: Salaries, Subsidies, Interest Payments.
• Capital Budget: Creates assets or reduces liabilities.
  • Receipts: Disinvestment, Loans.
  • Expenditure: Building roads, Repaying loans (Capex).

2. Deficits

• Fiscal Deficit: Total Exp - Total Receipts (excluding borrowings). Indicates total borrowing requirement.
• Revenue Deficit: Revenue Exp - Revenue Receipts. Indicates borrowing for consumption (Bad).
• Primary Deficit: Fiscal Deficit - Interest Payments.

Conclusion

A high Capex multiplier is good for growth. The FRBM Act aims to limit Fiscal Deficit to 3% of GDP.