Effective Revenue deficit – a new measure/jargon in Indian public finances

Understanding the Union Budget in entirety remains a major challenge despite many attempts in the past . With so many numbers and concepts and linkages of various tables and items, it is a mind-boggling exercise .

I will try and post more on the  budget as I again fine comb the budget documents  for FY 2011-12.

This year the government has decided to introduce a new measure for estimating true revenue deficit  – Effective revenue deficit.

In his speech, the FM said people say  revenue deficit remains sticky.

There has been some concern expressed regarding the stickiness of Government’s revenue deficit in the post-global crisis phase of the economy.For 2010-11 as against a target of 4 per cent, the revenue deficit is estimated at 3.4 per cent of GDP.

The problem is not with stickiness but the way certain revenue expenditure is classified in the budget. These are actually capital expenditure but are classified as revenue as the proceeds go to states.

In the past few years the transfers to States and other developmental expenditure have grown significantly. These are classified as revenue expenditure even though a considerable part of the expenditure from these transfers is in the nature of capital expenditure.

Fiscal Policy Strategy document explains further at the end. It points to certain programs like Pradhan Mantri Gramin Sadak Yojana, JN National Urban Renewal Mission, Irrigation benefit program etc. These are funded by centre but implemented by state. This requires funds transfer from centre to states and hence kept in revenue expenditure. But these are not unproductive and create capital assets. This is called as Grants for Capital Assets (GoCA). The list of all such capital assets  are here. It will now be  mentioned seperately in Volume 1 of expenditure budget.

Once we make adjustments for GoCA, the RD is much lower. RD for 2011-12 is at 3.4% of GDP. These GoCA is about 1.6% of GDP. So half of RD is by these capital assets. Once you made adjustments, you have a much lower RD.  FinMin now calls this adjusted revenue deficit as Effective Revenue Deficit.

In 2010-11,  Rs 90,792 crore from such revenue expenditures were in the nature of capital expenditure. Similarly, in 2011-12 grants-in-aid for creation of capital assets, which are now shown separately in the Budget documents, are about Rs 1.47 lakh crore.Taking these budget provisions into account, the “effective revenue deficit” is estimated at 2.3 per cent in the Revised Estimates for 2010-11 and 1.8 per cent for 2011-12.

Interesting bit.

I was trying to look at this GoCA and actual expenditures in various social programs:

Ministry Outlay (in Rs Cr) 2010-11 (BE) 2010-11 (RE) 2011-12 (BE)
Pradhan Mantri Gram Sadak Yojana (PMGSY) 9996 18996 16006
Indira Awas Yojana 8996 9333.5 8996
Swarnjayanti Gram Swarozgar Yojana 2683 2683 2621.6
MGNREGA 40100 40100 40000
Grant of Capital Assets (in Rs Cr) 2010-11 (BE) 2010-11 (RE) 2011-12 (BE)
Pradhan Mantri Gram Sadak Yojana (PMGSY) 9854.2 19854.2 16464.19
Indira Awas Yojana 9991.2 10328.7 9991.2
Swarnjayanti Gram Swarozgar Yojana 50 50 50
MGNREGA 0.01 0.01 39974.08

As we expect, GoCa is lesser than total allocation. But the whole thing is not clear. What is the general ratio for transfer to states for the schemes? How does GoCa in MGNREGA rise in 2011-12? How was it being alloted in 2010-11 and earlier?

This transfer could be based on both constitution divide between centre and state and finance commission divison of revenues. More clarity is needed.

But an interesting concept by Finance Ministry. It acts swiftly to  lower its deficits but takes almost 5 years to bring oil bonds etc in fiscal deficits. Also fiscal deficit still does not include contingent liabilities in the deficit despite being proposed. Others have also  proposed not to include 3G and disinvestment proceeds in revenues. May be it will in coming years and we get a more realistic picture.

Till then, add another measure of  government deficits to your list….

5 Responses to “Effective Revenue deficit – a new measure/jargon in Indian public finances”

  1. akhil singla Says:

    Thank You so much for your efforts in technical clearance of budgetory terms.

  2. saurabh Says:

    Thanks a lot for your efforts. I was not able to understand the “effective revenue deficit concept” earlier but your article makes concepts about budgetary jargon easier to comprehend. Also the links were informative. Thank you again.

  3. Affiliate Network,Affiliate Program, 2 tier, two tier,revenue,home business,refferal,commission Says:

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  4. Ram Kishan Rao Chilappagari Says:

    a good analysis

  5. praveen Says:

    thanks a lots for clearing the concept

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