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  1. Budget 2018: What is Revenue Deficit and Primary Deficit?

Budget 2018: What is Revenue Deficit and Primary Deficit?

Budget 2018: Finance Minister Arun Jaitley is all set to announce Budget 2018 - the most important annual economic document for the country. To understand the budget, one needs a short insight on some crucial subjects. Two such topics are Revenue Deficit and Primary Deficit.

By: | Updated: January 31, 2018 7:48 PM
Budget 2018: The Revenue Deficit, primary deficit, fiscal deficit generally finds its mention in Budget. Budget 2018: The Revenue Deficit generally finds its mention in Budget.

Budget 2018: Finance Minister Arun Jaitley is all set to announce Budget 2018 – the most important annual economic document for the country. Budget 2018 is the last regular budget of Modi government and is being considered as the most challenging one. A number of announcements are likely to take place in the budget which will affect the common man. Two important things to be understood are – Revenue Deficit and Primary Deficit. The Revenue Deficit generally finds its mention in Budget. Here’s a simple explanation of what Revenue Deficit means for a common man:

What is Revenue Deficit and Primary Deficit?

While people have a fair understanding of Fiscal Deficit, they are usually confused with terms Primary and Revenue deficit. Before Budget 2018, it is important to understand the two terms. As a matter of fact, in a way, the two are a sub-parts of fiscal deficit only. While fiscal deficit is calculated as the difference between total revenue and expenditure, the primary deficit can be arrived by deducting interest paid on the borrowings from the fiscal deficit. For further understanding, the scenario can be looked like this – the money paid to creditors as interest naturally forms a part of total government’s expenditure, however, like other schemes, it is not an intentional initiation of the government. So the amount should ideally not form a part of entire spending made by the government for developmental works.

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A look at the term Revenue Deficit before 2018: Revenue deficit is a result of a mismatch between expected revenue and expenditure. Not to be confused with the fiscal deficit, revenue deficit arises when government’s actual net receipts are lower than the projected receipts. On the other hand, if the actual receipts are higher than projected by the government, the situation is termed as revenue surplus. It should be noted that revenue deficit does not mean the actual loss of revenue. Let’s understand the same with the help of an example. If the government spends Rs 100 and earns Rs 125, the net revenue will be Rs 25. However, if the government has estimated expenditure at Rs 100, and earning at Rs 130, than its expected revenue would be set at Rs 30. But, since the actual earning is Rs 25, the it will lead to a revenue deficit of Rs 5 (Expected Revenue Rs 30- Achieved Revenue Rs 25).

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A look at the Fiscal Deficit

In general terms, a fiscal deficit arises whenever the government makes more expenditure than the revenue it brings in during the fiscal year. A Fiscal Deficit is also termed as current accounts deficit or the budget deficit. Technically, the difference between total revenue and total expenditure of the government is termed as fiscal deficit. The Fiscal Deficit is an indication of the total borrowings needed by the government. Borrowings are not included while calculating the total revenue. Generally, fiscal deficit takes place due to two reasons – revenue deficit or a hike in capital expenditure. FM Arun Jaitley is likely to ease Fiscal Deficit in Budget 2018.

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