A deficit is the amount by which a sum falls short of some reference amount. A deficit is an amount by which one resource, especially money, falls short of what is required. If expenditures exceed income, imports exceed exports, or liabilities exceed assets, a deficit exists. A deficiency or loss is synonymous with a deficit, and it is the opposite of a surplus.
Types of Deficits in India
The following are the various types of deficits and the way to arrive at them.
Revenue deficit: Revenue expenditure is defined as the excess of total revenue expenditure over the total revenue receipts. In other words, the shortfall of revenue receipts as compared to that of the revenue expenditure is known as revenue deficit
Revenue deficit signals to the economists that the revenue earned by the government is insufficient to meet the requirements of the expenditures required for the essential government functions.
The formula for revenue deficit can be expressed as follows:
Revenue deficit = Total revenue expenditure – Total revenue receipts
Impact of Revenue Deficit
Revenue deficit has the following impacts on the economy.
- Reduction in assets: For meeting the shortfall in the form of revenue deficit, the government has to sell some assets.
- It leads to the conditions of inflation in the economy.
- A large amount of borrowing leads to a greater debt burden on the economy.
Remedial Measures for Revenue Deficit
The following remedial measures can be taken by the government in reducing the revenue deficit.
- By reducing unnecessary spending
- By raising the rate of taxes and applying new taxes wherever possible
Primary deficit is said to be the fiscal deficit of the current year subtracted by the interest payments that are pending on previous borrowings. In other words, the primary deficit is the requirement of borrowing without the interest payment.
Primary deficit, therefore, shows the expenses that government borrowings are going to fulfil while not paying for the income interest payment.
A zero deficit shows that there is a requirement for availing credit or borrowing for clearing the interest payments pending.
The formula for the primary deficit is expressed as follows:
Primary deficit = Fiscal deficit – Interest payments
Measures to reduce the primary deficit can be similar to the steps taken to reduce the fiscal deficit as the primary deficit is any borrowings that are above the existing deficit or borrowings.
Fiscal deficit is defined as the excess of total expenditures over the total receipts, excluding the borrowings in a year. In other words, this can be defined as the amount that the government needs to borrow in order to meet all expenses.
The more the fiscal deficit, the more will be the amount borrowed. Fiscal deficit helps in understanding the shortfall that the government faces while paying for the expenditures in the absence of lack of funds.
The formula for calculating fiscal deficit is as follows:
Fiscal deficit = Total expenditures – Total receipts excluding borrowings
Impact of Fiscal Deficit
The following impacts of fiscal deficit should be kept in mind.
- Unnecessary expenditure: A high fiscal deficit leads to unnecessary expenditure done by the government that leads to potential inflationary pressure on the economy.
- Printing more currency by RBI for meeting the deficit, also known as deficit financing, leads to the availability of more money in the market, leading to inflation.
- Borrowing more will hinder the future growth of the economy, as most of the revenue will be utilised towards meeting debt payments.
Remedial Measures for Fiscal Deficit
Fiscal deficit can be reduced by the following ways:
- Reduced public expenditure
- Reduction in bonus, leave encashments, and subsidies
- Increase tax to generate revenue
- Disinvestment of public sector units
In terms of finance, deficit refers to a shortfall of certain economic resources, mostly money. Since deficit implies a shortage of funds or an excess of cash outflows over inflows, it does not present a favorable situation for an entity. Therefore, experts consider deficits to be highly unsustainable and detrimental to long-term economic stability. Fiscal deficits and trade deficits are among the most important kinds of government deficits.