Measuring the gap: balanced, surplus and deficit budgets

Detail

1. Where the "gap" comes from

• Article 112 of the Constitution requires the President to lay an Annual Financial Statement (the Union Budget) before Parliament every year. It shows the government's estimated receipts and expenditure for the financial year.
• If you compare receipts with expenditure, you get one of three results. Each result is a type of budget.

2. Types of budget

• Balanced budget: expenditure = revenue. The government spends exactly what it earns.

• Example: receipts ₹100 crore, spending ₹100 crore, so the gap is 0.

• Surplus budget: receipts are more than expenditure. The government saves.

• Example: receipts ₹100 crore, spending ₹90 crore, so the surplus is ₹10 crore.

• Deficit budget: expenditure is more than receipts. The government must borrow or draw down its cash to fill the gap.

• Example: receipts ₹100 crore, spending ₹120 crore, so the deficit is ₹20 crore.
• This is the most common case, in India and in most countries.

3. The old Indian measure: "budget deficit"

• Budget deficit = Total expenditure − Total receipts. Total receipts here means revenue plus capital receipts, including borrowing.
• Because borrowing is already counted as a receipt, the gap left over was the part that was not covered even by market borrowing.
• This last gap was filled by the RBI through ad hoc Treasury Bills (T-bills). These were short-term bills that the government issued straight to the RBI, which in effect meant printing new money.
• How it ended:
• The RBI and the Government of India signed an agreement on 9 September 1994 to phase out ad hoc T-bills by 1997-98 [6].
• From 1 April 1997, ad hoc and tap T-bills were replaced by Ways and Means Advances (WMA), which are short-term loans from the RBI that the government must repay within limits [6].
• With ad hocs gone, the RBI noted that the conventional "budget deficit" concept lost its relevance [6].

• NCERT (footnote 6): the budget deficit measure was discontinued from 1997-98.

• Why this matters: monetising the deficit (paying for it with RBI money) pushes up inflation. Fiscal deficit took budget deficit's place as the main measure.

4. Revenue deficit (RD)

• Formula: RD = Revenue expenditure − Revenue receipts
• Revenue expenditure is spending that creates no asset, such as salaries, interest, subsidies and pensions.

• Revenue receipts are income that creates no liability, such as taxes and non-tax income (dividends, fees).

• The FRBM Act says the same thing: RD is the excess of revenue expenditure over revenue receipts [4].

• Government dissaving: when RD > 0, the government is using the savings of other sectors (households, firms) to pay for part of its consumption.
• Chain of harm:
• Step 1: borrowing for consumption. The government borrows for day-to-day spending, not just for investment.
  • So debt grows, and future interest payments grow with it.
• Step 2: committed spending cannot be cut. Interest, salaries and pensions are fixed.
  • So when money is short, the easy thing to cut is capital expenditure (capex) or welfare spending.

• Step 3: long-run cost. Less capex means less infrastructure and lower growth. Less welfare means worse human development.

• Worked example (NCERT Table 5.1): RD = 11.8 − 9.2 = 2.6% of GDP.

• Latest: RD is 1.5% of GDP in both 2025-26 RE and 2026-27 BE [3].

5. Effective revenue deficit (ERD)

• Formula: ERD = RD − Grants for creation of capital assets
• Some revenue spending is actually grants to states or agencies that they use to build assets, such as roads under centrally sponsored schemes. In the Centre's books these count as "revenue", but they create capital.

• ERD removes these grants. What is left is the borrowing that truly pays for consumption.

• In PRS's words, ERD is the difference between RD and grants for creation of capital assets [5].

• Timeline: introduced in Budget 2011-12; made a statutory target by the FRBM amendment of 2012.
• Example: if RD = 2.6% and capital-asset grants = 1.0%, then ERD = 1.6%.

6. Fiscal deficit (FD)

• Formula: FD = Total expenditure − (Revenue receipts + Non-debt creating capital receipts)

• Non-debt creating capital receipts (NDCR) are capital receipts that do not create a future repayment duty: recovery of loans and disinvestment (selling government shares in PSUs).

• Legal definition (FRBM Act, 2003): FD is the excess of total disbursements from the Consolidated Fund of India, excluding repayment of debt, over total receipts into the Fund, excluding debt receipts, during a financial year [4].

• Meaning: FD is the government's total borrowing requirement from all sources (market bonds, small savings, external loans and so on).
• Alternative form: FD = RD + Capital expenditure − NDCR. So RD is a part of FD.
• It is the key measure of the public sector's financial health.
• Worked example (Table 5.1):
• FD = 15.0 − 9.4 = 5.6%.

• Check: 2.6 + 3.2 − 0.2 = 5.6%.

• Worked example (2026-27 BE, ₹):

• Expenditure is ₹53.5 lakh crore and non-debt receipts are ₹36.5 lakh crore [2][3].

• So FD ≈ ₹17.0 lakh crore, which is 4.3% of GDP [2].

• How the FD is financed (2026-27 BE): net market borrowing through dated securities is ₹11.7 lakh crore; gross market borrowing is ₹17.2 lakh crore [2]. The rest comes from small savings, other liabilities and cash drawdown.

7. Primary deficit (PD)

• NCERT formula: PD = FD − Net interest liabilities

• Net interest liabilities = interest payments − interest receipts on net domestic lending.

• Budget practice: PD = FD − Interest payments.

• Meaning: interest is the cost of past borrowing. PD removes it, so it shows the current fiscal imbalance, meaning whether this year's policies by themselves add to debt.
• If PD = 0, the government borrows only to pay interest on old debt.

• If PD < 0 (a primary surplus), current revenue covers current non-interest spending with money left over.

• Worked example (Table 5.1): PD = 5.6 − 3.6 = 2.0%.

• Why interest matters: in 2026-27 BE, interest payments are 26% of total expenditure and 40% of revenue receipts [3]. So ₹40 of every ₹100 the Centre earns goes to old debt.

8. NCERT Table 5.1 (Central Government, % of GDP)

Item	% of GDP
1. Revenue receipts (a + b)	9.2
(a) Tax revenue (net of states' share)	7.9
(b) Non-tax revenue	1.4
2. Revenue expenditure, of which	11.8
(a) Interest payments	3.6
(b) Major subsidies	1.4
(c) Defence	1.0
3. Revenue deficit (2 − 1)	2.6
4. Capital receipts, of which	5.8
(a) Recovery of loans	0.1
(b) Other receipts (mainly disinvestment)	0.1
(c) Borrowings and other liabilities	5.6
5. Capital expenditure	3.2
6. Non-debt receipts [1 + 4(a) + 4(b)]	9.4
7. Total expenditure [2 + 5]	15.0
8. Fiscal deficit [7 − 1 − 4(a) − 4(b)]	5.6
9. Primary deficit [8 − 2(a)]	2.0

• Check the maths:
• FD = 15.0 − 9.4 = 5.6.
• FD = RD 2.6 + capex 3.2 − NDCR 0.2 = 5.6.

• PD = 5.6 − 3.6 = 2.0.

• Note: borrowings (4c, 5.6) = FD (5.6). This confirms that FD equals the total borrowing requirement.

• Errors in the NCERT table:
• It is labelled "2024-25 (P.A.)", but its values match the 2023-24 actuals.
• "Total expenditure 1.5" is a misprint for about 15.0.
• The plan/non-plan rows are empty because that split has been abolished.

9. Latest figures (Centre, % of GDP)

Year	Fiscal deficit	Revenue deficit	Note
2020-21	9.2	—	COVID peak
2023-24	5.6	2.6	Actuals (= Table 5.1)
2024-25	4.8	—	Actuals
2025-26	4.4	1.5	RE, the same as BE; the glide-path target of below 4.5% was met [2][3]
2026-27	4.3	1.5	BE [2][3]

• The FRBM Act's original aim (2003):
• Eliminate the revenue deficit, and later build a revenue surplus.

• Bring FD down to 3% of GDP by March 2008 [5].

• The new anchor is debt, not the deficit:

• The Centre aims to bring its outstanding liabilities to about 50 ± 1% of GDP by March 2031 [3][7].
• Debt-to-GDP is 56.1% (2025-26 RE) and 55.6% (2026-27 BE) [2].
• As the debt ratio falls, interest payments shrink and money is freed for priority spending [2].

10. Quality of government expenditure

• The RD/FD ratio tells you what share of borrowing is used for consumption rather than capital formation.

• A rising RD/FD means the quality of government expenditure is getting worse (NCERT summary point 4).

• Worked example:

• Table 5.1 (2023-24): RD/FD = 2.6/5.6 ≈ 46%. Nearly half of all borrowing went to revenue spending.

• 2026-27 BE: RD/FD = 1.5/4.3 ≈ 35% (calculated from [3]). So a larger share of borrowing now funds assets.

• Capex push: public capex is budgeted to rise from ₹11.2 lakh crore to ₹12.2 lakh crore in 2026-27 [3].

Prelims Hooks

• FD = Total expenditure − (Revenue receipts + NDCR), which is the same as the government's total borrowing requirement.
• FD = RD + Capex − NDCR. So RD is a part of FD, and RD can never be larger than FD unless capex is below NDCR.
• PD = FD − Interest payments. PD = 0 means the government borrows only to pay interest on past debt.
• ERD = RD − Grants for creation of capital assets. It was introduced in Budget 2011-12 and made an FRBM target by the 2012 amendment.
• The old budget deficit measure counted borrowing as a receipt. It was dropped from 1997-98, when WMA replaced ad hoc T-bills from 1 April 1997 [6].
• The FRBM Act defines FD in terms of the Consolidated Fund of India, excluding debt repayment and debt receipts [4].
• Trap: disinvestment and recovery of loans are capital receipts but non-debt, so they reduce the FD. Borrowing is also a capital receipt, but it is the FD.
• 2026-27 BE: FD 4.3%, RD 1.5%, debt 55.6% of GDP; target of about 50 ± 1% by 2030-31 [2][3].
• Art. 112 covers the Annual Financial Statement (the Budget). The Constitution does not use the word "budget".

Mains Points

• FD alone is not enough to judge fiscal health.
• The quality of the deficit matters too, measured by RD/FD, ERD and capex share.

• A 4.3% FD that funds roads and railways is healthier than a 4.3% FD that funds subsidies. Borrowing for assets can pay for itself through future growth.

• The shift from a deficit anchor to a debt anchor (50 ± 1% by 2031):

• It gives flexibility in bad years, such as the COVID year, when FD hit 9.2% (2020-21).

• Critics warn that it weakens year-by-year discipline. Also, the debt ratio depends on nominal GDP growth, which the government does not fully control.

• Interest burden and crowding-out:

• Interest takes 40% of revenue receipts (2026-27 BE) [3]. This squeezes capex and welfare, which is the NCERT chain of harm in real life.
• Large government borrowing also raises bond yields, so private firms find it costlier to borrow and invest.

• Keeping the primary deficit low is the lasting fix.

• Ending monetisation in 1997 (ad hoc T-bills → WMA) separated fiscal policy from money creation. This made later RBI inflation targeting possible and credible.