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August 06, 2014

Indian Fiscal System


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Friends, in our last post we have discussed about Indian Financial System. Today we shall discuss about Indian Fiscal System. It refers to the management of revenue and capital expenditure finances of the state.

Fiscal Policy 

It refers to the use of taxation, public expenditure and the management of the public debt in order to achieve certain specified objectives. These uses can affect the following macroeconomic variables in an economy.

  • Aggregate demand and the level of economic activity.
  • The distribution of income
  • The patter of resource allocation within the government sector and relative to the private sector. 

Sources of Revenue

Main sources of revenue are customs duties, excise duties, service tax, taxes on property, corporate, income taxes.

Sources of Expenditure

  • Plan expenditure : It includes agriculture, rural development, irrigation and flood control, energy, industry, minerals, transport and communications etc.
  • Non-Plan Expenditure : It consists of interest payments, defense, subsidies, and general services.

Public Debt

  • Internal Debt : It comprises loans raised from the open market treasury bills issued to the RBI, Commercial Banks etc.
  • External Debt : It consists of loans taken from World Bank ,IMF, ADB and Individual Countries. 


In a budget statement, four types of deficits are mentioned. Those are,
  1. Revenue
  2. Capital
  3. Fiscal
  4. Primary

Revenue Deficit

There are various ways to represent and interpret a Government's deficit. The simplest is the revenue deficit which is just the difference between revenue receipts and revenue expenditures.
  • Revenue Deficit = Revenue Expenditure - Revenue Receipts

Capital Deficit

An imbalance in a nation's balance of payments capital account, in which payments made by the country for purchasing foreign assets exceed payments received by the country for selling domestic assets. In other words, investment by the domestic economy in foreign assets is less than foreign investment in domestic assets. This is generally not a desirable situation for a domestic economy.
  • Capital Deficit = Capital Receipts - Disbursement on Capital Account

Fiscal Deficit

This is the sum of revenue and capital expenditure less all revenue and capital receipts other than loan taken. This gives a more holistic view of the Government's funding situation since it gives the difference between all receipts and expenditures other than loans taken to meet such expenditures.

  • Fiscal Deficit = Difference between country expenditure and earnings

  • Fiscal Deficit = Revenue receipts (Net Tax Revenue + Non Tax Revenue) + Capital Receipts (only recoveries of loans and other receipts) - Total expenditure (Plan and non-plan)

Primary Deficit

Amount by which a Government's total expenditure exceeds its total revenue, excluding interest payments on its debt.
  • Primary deficit = Fiscal Deficit - Interest Payments

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