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Deficits, public debt and the FRBM Act

मराठीत स्पष्टीकरण

Budget and fiscal policy · Part 2 / 1 · Fact-checked on · how we check

Written with AI from the sources listed at the bottom of this page, then fact-checked by a separate AI.

Every measure of deficit (fiscal, revenue, effective revenue, primary, monetised and the old budget deficit) with its formula and meaning, how deficits are financed and what they do (crowding out, inflation, interest burden), when public debt is sustainable and how states borrow under Article 293, and India's fiscal rules from the FRBM Act of 2003 through its amendments, the escape clause and the N.K. Singh committee to the present consolidation path and debt anchor.

Each idea is explained first in Marathi (मराठी), ending with the English and Hindi exam terms, followed by the same point in exam English. UPSC Prelims is in English or Hindi, so understand it in Marathi and revise it in English.

पहिल्या भागात जमा आणि खर्च विभागले; आता त्यांच्यातील दरी मोजू. तूट म्हणजे चूक नाही: कर्ज काढून रेल्वे मार्ग बांधला तर देश समृद्ध होतो. पण दरवर्षी कर्ज काढत राहिले तर सार्वजनिक कर्ज वाढते आणि त्याचे व्याज उद्याचे उत्पन्न खाऊन टाकते. शेतकरी पीककर्ज न फेडता नवे कर्ज घेत राहिला तर काय होते तसेच. म्हणून राजकोषीय तूट मोजली जाते, आणि राजकोषीय जबाबदारी व अर्थसंकल्प व्यवस्थापन कायदा तिला मर्यादा घालतो. (→ English: fiscal deficit · हिन्दी: राजकोषीय घाटा)

In exam EnglishPart 1 sorted every receipt and every item of spending into revenue and capital. This part measures the gaps between them. A deficit is not wrong in itself: a government that borrows to build railways can leave the country richer. But borrowing every year adds to public debt, interest on that debt claims a growing share of future revenue, and heavy borrowing can push up interest rates for everyone else. So economists track several measures of the gap, each answering a different question, and India's Fiscal Responsibility and Budget Management Act sets legal limits on them. The part covers the fiscal deficit and its relatives, how deficits are financed and what they do to the economy, when public debt is sustainable, and the fiscal rules from 2003 to the debt target now in force.

राजकोषीय तूट म्हणजे एकूण खर्चातून महसुली जमा आणि कर्जेतर भांडवली जमा वजा केल्यावर उरते ती रक्कम. ती सरकारला कर्जाने उभी करावी लागते. उदाहरण: खर्च ₹100, महसुली जमा ₹70, हिस्सा विकून आणि कर्जवसुलीतून ₹3: तूट ₹27, ती कर्जच. ती सकल देशांतर्गत उत्पादन याच्या टक्केवारीत सांगतात; ₹27 ची दरी मोठ्या व्यापाऱ्याला लहान, छोट्या दुकानदाराला मोठी. कर्ज कशासाठी वापरले हे हा आकडा सांगत नाही. (→ English: fiscal deficit · हिन्दी: राजकोषीय घाटा)

In exam EnglishThe fiscal deficit is the headline number. It equals total expenditure minus the sum of revenue receipts and non-debt capital receipts. Because borrowing is left out of the receipts side, what remains is exactly the amount the government must borrow and raise through other liabilities during the year; that is why it is often described as the government's total borrowing requirement. Suppose the Centre spends ₹100, collects ₹70 in revenue receipts and ₹3 from disinvestment and loan recoveries: the fiscal deficit is ₹27, and that ₹27 is borrowed. It is usually stated as a share of gross domestic product, since a ₹27 gap means something very different in a large economy and a small one. A fiscal deficit says nothing by itself about how the borrowed money is used; the next two measures help answer that.

महसुली तूट म्हणजे महसुली खर्चातून महसुली जमा वजा केल्यावर येते ती. पगार, व्याज, अनुदान यांसारख्या रोजच्या खर्चालाच स्वतःचे उत्पन्न पुरत नाही म्हणून कर्ज काढणे; महिन्याच्या किराण्याच्या बिलासाठी कर्ज काढावे तसे. पण राज्यांना दिलेल्या अनुदानातून शाळा, रस्ते बांधले तर तो खरा वायफळ खर्च नाही. म्हणून 2012 मध्ये प्रभावी महसुली तूट आणली: महसुली तुटीतून मालमत्ता निर्मितीसाठी दिलेली अनुदाने वजा करतात. महसुली तूट शून्य असली तरी गुंतवणुकीसाठी कर्ज असू शकते. (→ English: effective revenue deficit · हिन्दी: प्रभावी राजस्व घाटा)

In exam EnglishThe revenue deficit is revenue expenditure minus revenue receipts. It shows how far the government cannot meet even its running costs, such as salaries, interest and subsidies, from its regular income, and must borrow to pay for them. Borrowing for consumption is the worrying kind, because it leaves debt without an asset to show for it, much like taking a loan to pay the monthly grocery bill. But part 1 noted a catch: grants to states count as revenue expenditure even when states build assets with them. To correct for this, the 2012 amendment to the FRBM Act introduced the effective revenue deficit, which is the revenue deficit minus grants for the creation of capital assets. It is a truer picture of borrowing that funds consumption across the Union and the states. Note that a revenue deficit of zero does not mean no fiscal deficit: a government could still borrow, but only to invest.

प्राथमिक तूट म्हणजे राजकोषीय तुटीतून व्याजाची देणी वजा केल्यावर उरते ती. व्याज जुन्या कर्जांचे; ते वजा केले की या वर्षीच्या धोरणांमुळे किती तूट आली ते कळते. एखादे कुटुंब वडिलांनी घेतलेल्या जुन्या कर्जाचे व्याज भरत, नवे खर्च मात्र स्वतःच्या कमाईतून चालवत असेल तर त्याची प्राथमिक तूट शून्य. उदाहरण: राजकोषीय तूट ₹27, व्याज ₹20 असेल तर प्राथमिक तूट ₹7. दोघांतील फरक मोठा असेल तर जुनी कर्जे अर्थसंकल्प गिळत आहेत असा अर्थ. (→ English: primary deficit · हिन्दी: प्राथमिक घाटा)

In exam EnglishThe primary deficit is the fiscal deficit minus interest payments. Interest is paid on debt taken in the past, so removing it shows how much of this year's borrowing is caused by this year's policies. If the primary deficit is zero, the government is borrowing only to pay interest on old debt; if there is a primary surplus, its current revenues more than cover its current non-interest spending. Take the earlier example: with a fiscal deficit of ₹27 and interest payments of ₹20, the primary deficit is ₹7. The measure matters for debt sustainability, explained below, because whether the debt ratio rises or falls depends partly on this primary balance. A large gap between the fiscal and primary deficits is itself a warning sign: it means past borrowing is already eating a big slice of the Budget.

दोन जुनी मापे. अर्थसंकल्पीय तूट: एकूण खर्चातून एकूण जमा वजा करून उरलेली दरी आरबीआयला तात्पुरती ट्रेझरी बिले देऊन भरली जाई; म्हणजे सरकारसाठी आपोआप नोटा छापल्यासारखेच. 1 एप्रिल 1997 पासून ते थांबले आणि मर्यादा असलेली, परत फेडावी लागणारी अर्थोपाय अग्रिम आली. मुद्रीकृत तूट म्हणजे आरबीआयने सरकारला दिलेले निव्वळ कर्ज वाढले तो भाग; यामुळे थेट पैसा वाढून महागाई वाढू शकते. (→ English: monetised deficit · हिन्दी: मौद्रीकृत घाटा)

In exam EnglishTwo older measures still appear in questions. The budget deficit was total expenditure minus total receipts, where receipts included ordinary borrowing; the gap left over was filled by issuing ad hoc treasury bills to the RBI, which in effect printed money for the government automatically. An agreement between the government and the RBI ended ad hoc treasury bills from 1 April 1997, replacing them with ways and means advances that have limits and must be repaid, and the budget deficit stopped being a useful figure. The monetised deficit is the part of the deficit met by an increase in the RBI's net credit to the government. It matters because such credit adds directly to reserve money and can feed inflation, which is why the FRBM Act later barred the RBI from buying government securities when they are first issued, except in narrow circumstances. The table below brings the measures together.
Measures of deficit at a glance
MeasureFormulaWhat it shows
Fiscal deficitTotal expenditure − (revenue receipts + non-debt capital receipts)Total borrowing need of the year
Revenue deficitRevenue expenditure − revenue receiptsBorrowing to meet running costs
Effective revenue deficit (2012)Revenue deficit − grants for creation of capital assetsBorrowing for consumption, net of asset-building grants
Primary deficitFiscal deficit − interest paymentsBorrowing caused by this year's policies
Monetised deficitIncrease in the RBI's net credit to the governmentPart of the deficit financed by the central bank
Budget deficit (dropped after 1997)Total expenditure − total receiptsGap once filled by ad hoc treasury bills

केंद्राच्या तुटीचा मोठा भाग देशांतर्गत बाजारातूनच: आरबीआयच्या लिलावातून विकले जाणारे सरकारी रोखे, ट्रेझरी बिले, अल्पबचत निधी, थोडे परदेशी कर्ज. गावातला सगळा पैसा एखाद्या मोठ्या माणसाने कर्जाने घेतला तर छोट्या व्यापाऱ्याला कर्ज मिळत नाही, मिळाले तरी व्याज जास्त; हाच बहिर्गमन परिणाम. नोटा छापून तूट भरली तर महागाई वाढते. कर्ज वाढले की व्याज वाढून शाळा, रुग्णालयांसाठीचा पैसा घटतो. पण मंदीत खासगी गुंतवणूक तशीही नसताना हा परिणाम कमी असतो. (→ English: crowding out · हिन्दी: निष्कासन प्रभाव)

In exam EnglishMost of the Centre's fiscal deficit is financed from the domestic market: dated government securities sold through auctions conducted by the RBI, short-term treasury bills, money from the National Small Savings Fund and, to a small extent, loans from abroad. Borrowing on this scale has effects. When the government competes with firms for the same pool of savings, interest rates can rise and some private investment that would otherwise have happened does not; this is crowding out. If the borrowing is financed by the central bank creating money, the risk shifts to inflation. And because today's deficit becomes tomorrow's debt, interest payments grow and squeeze the room for schools, health and roads. The effects are not fixed: in a deep slowdown, when firms are not investing anyway, public borrowing may crowd out little and support demand a lot, which is the case for counter-cyclical policy taught in part 1.

प्रत्येक वर्षीची तूट सार्वजनिक कर्ज याच्या ढिगात भर घालते. केंद्राचे कर्ज बहुतेक देशांतर्गतच: बँका, विमा कंपन्या, आरबीआय; परदेशी भाग छोटा. महत्त्वाचे रुपयांतील रक्कम नव्हे, उत्पन्नाच्या तुलनेत कर्ज किती हे. एखाद्याचे उत्पन्न दरवर्षी 10% वाढत असेल आणि कर्जावरचे व्याज 7% असेल तर कर्जाचा भार घटतो; व्याज जास्त आणि उत्पन्न हळू वाढले तर कर्ज डोंगरासारखे वाढते. राज्यांनी अनुच्छेद 293 नुसार देशातूनच कर्ज घ्यावे; केंद्राचे देणे बाकी असेल तर नव्या कर्जासाठी केंद्राची संमती लागते. (→ English: public debt · हिन्दी: लोक ऋण)

In exam EnglishEach year's deficit adds to the stock of public debt. The Centre's debt is mostly internal (owed to banks, insurance companies, the RBI and others in India), with a small external part, and its wider liabilities also include money it owes through the Public Account, such as small savings and provident funds. General government debt adds the debt of the states. What matters is not the rupee amount but the debt-to-GDP ratio. That ratio stays steady or falls when the economy's nominal growth rate is higher than the interest rate the government pays and the primary deficit is small; if interest rates exceed growth for long, debt can snowball even without new spending. States face their own limits. Under Article 293 a state may borrow only within India on the security of its Consolidated Fund, and a state that still owes money to the Centre needs the Centre's consent to raise a new loan.

1980, 90 च्या दशकांत तूट वाढत जाऊन 1991 च्या संकटाला हातभार लागला; म्हणून नियम आले. राजकोषीय जबाबदारी व अर्थसंकल्प व्यवस्थापन कायदा 2003 मध्ये आला, त्याचे नियम जुलै 2004 पासून लागू. हेतू: आपल्या पिढीची बिले मुलांच्या पिढीवर टाकू नयेत; आजोबांचे कर्ज नातवाने फेडावे हे न्याय्य आहे का? मूळ लक्ष्ये: राजकोषीय तूट 3%, महसुली तूट शून्य. आरबीआयने नवे रोखे थेट विकत घेऊ नयेत. 2008 च्या जागतिक संकटात हा मार्ग थांबला; 2012 आणि 2015 मध्ये मुदती वाढवल्या. (→ English: Fiscal Responsibility and Budget Management Act · हिन्दी: राजकोषीय उत्तरदायित्व और बजट प्रबंधन अधिनियम)

In exam EnglishRules came after a long rise in deficits through the 1980s and 1990s, which had contributed to the 1991 crisis. The Fiscal Responsibility and Budget Management Act was passed in 2003, and its Rules took effect in July 2004. It aimed at inter-generational equity: the present generation should not leave its bills to the next. Its original targets were a fiscal deficit of 3 per cent of GDP and the elimination of the revenue deficit, first by 31 March 2008 and, after an amendment in 2004, by 31 March 2009. It required the government to lay fiscal policy statements with every Budget, set out a medium-term path, and stopped the RBI from subscribing to primary issues of government securities except in specified cases. The path was paused when the government spent more to support the economy during the global financial crisis of 2008. An amendment in 2012 added the effective revenue deficit and a Medium-Term Expenditure Framework statement and pushed the deadlines to 2015; a further amendment in 2015 moved them to 2018.

2016 मध्ये एन. के. सिंह यांच्या अध्यक्षतेखाली आढावा समिती नेमली, तिने जानेवारी 2017 मध्ये अहवाल दिला. तिचे म्हणणे: वार्षिक तुटीपेक्षा एकूण कर्ज महत्त्वाचे; केंद्र आणि राज्ये मिळून कर्ज 60% पेक्षा जास्त नसावे; स्वतंत्र राजकोषीय परिषद हवी (ती स्थापन झाली नाही). 2018 ची दुरुस्ती: केंद्राचे कर्ज 40%, एकूण 60%; तूट 3%; महसुली तुटीची लक्ष्ये काढली. सवलत कलम देखील घातले: युद्ध, आपत्ती, शेती कोसळणे अशा वेळी 0.5% पर्यंत जास्त तूट चालते, संसदेला कारण सांगून. घरात तातडीच्या दवाखान्याच्या खर्चासाठी अंदाजपत्रक ओलांडावे तसे. फेब्रुवारी 2020 च्या अर्थसंकल्पात ते वापरले. (→ English: escape clause · हिन्दी: निर्गम खंड)

In exam EnglishIn 2016 the government set up the FRBM Review Committee under N.K. Singh, which reported in January 2017. It argued that debt, not the yearly deficit, should be the main anchor of fiscal policy, suggested a general government debt ceiling of 60 per cent of GDP (40 per cent for the Centre and 20 for the states), and proposed an independent fiscal council; no such council has been created. The Finance Act of 2018 rewrote the targets accordingly: the Centre's debt was to be brought to 40 per cent and general government debt to 60 per cent of GDP by the end of 2024-25, the fiscal deficit to 3 per cent by 31 March 2021, and the revenue and effective revenue deficit targets were dropped. It also wrote an escape clause into the law. On grounds such as national security, war, national calamity, collapse of agriculture, far-reaching structural reforms or a sharp fall in real output growth, the government may exceed the deficit target by up to 0.5 per cent of GDP, after explaining the reasons to both Houses. The clause was invoked in the Budget presented in February 2020.

कोविडने हा मार्ग तोडला: उत्पन्न कोसळले, मदतीचा खर्च वाढला, 2020-21 मध्ये केंद्राची तूट 9% च्या पुढे गेली. 2021-22 च्या अर्थसंकल्पाने नवा राजकोषीय सुदृढीकरण मार्ग आखला: 2025-26 पर्यंत तूट 4.5% च्या खाली. 2026-27 च्या अर्थसंकल्पानुसार 2025-26 ची तूट 4.4% (सुधारित अंदाज), 2026-27 चा अंदाज 4.3%. आता लक्ष्य कर्जावर: 31 मार्च 2031 पर्यंत केंद्राचे कर्ज 50% (एक टक्का कमी-जास्त). ताप उतरल्यावर एकदम नाही, हळूहळू कामावर परतावे तसे. राज्यांचेही स्वतःचे कायदे आहेत. (→ English: fiscal consolidation · हिन्दी: राजकोषीय समेकन)

In exam EnglishThe pandemic broke the path: revenue collapsed and relief spending rose, and the Centre's fiscal deficit for 2020-21 went above 9 per cent of GDP. The Budget for 2021-22 then set a new course of fiscal consolidation, aiming to bring the deficit below 4.5 per cent of GDP by 2025-26. According to the Union Budget 2026-27, the deficit for 2025-26 was 4.4 per cent of GDP in the revised estimates, meeting that aim, and the budget estimate for 2026-27 is 4.3 per cent. The Budget for 2025-26 also announced a change of anchor in line with the review committee's advice: from 2026-27 the yearly deficit is to be set so that the Centre's debt keeps falling and reaches 50 per cent of GDP, plus or minus 1 percentage point, by 31 March 2031. Budget 2026-27 put the Centre's debt at about 55.6 per cent of GDP for that year. The states, meanwhile, have their own fiscal responsibility laws, which they passed after the Twelfth Finance Commission linked debt relief to such legislation.

ही सगळी मापे एक साखळी आहेत. राजकोषीय तूट: किती कर्ज. महसुली तूट: त्यातले रोजच्या खर्चासाठी किती. प्राथमिक तूट: जुन्या कर्जाचे व्याज सोडून या वर्षीच्या धोरणामुळे किती. सार्वजनिक कर्ज उत्पादनाच्या तुलनेत: हा मार्ग किती काळ टिकेल. एखादे कुटुंब कर्ज किती, कशासाठी, जुने व्याज किती, एकूण भार कमाईला झेपणारा आहे का हे तपासते तसे. आपले नियमही वार्षिक तुटीच्या लक्ष्यांकडून कर्जाच्या लक्ष्याकडे वळले आहेत. (→ English: fiscal deficit · हिन्दी: राजकोषीय घाटा)

In exam EnglishThe measures fit together as a chain. The fiscal deficit tells how much the government borrows; the revenue deficit and effective revenue deficit tell how much of that borrowing pays for consumption rather than assets; the primary deficit tells how much comes from present policy rather than past debt; and the stock of public debt, measured against GDP, tells whether the whole path can last. India's rules have moved along the same chain, from yearly deficit targets in 2003 to a debt anchor today, with an escape clause for genuine shocks. For the exam, keep the formulas exact, know which amendment added or removed each target, and link this part to part 1's revenue–capital split, to the RBI's role as debt manager, and to the Finance Commission, which shapes how much of the Centre's revenue goes to the states.

Exam traps

Recap

Practice questions

Q1. In a year a government has revenue receipts of ₹60, non-debt capital receipts of ₹5, revenue expenditure of ₹70, capital expenditure of ₹20 and interest payments of ₹15. What is its primary deficit?

  1. ₹10
  2. ₹25
  3. ₹15
  4. ₹5
Show answer

Answer: A. ₹10

Fiscal deficit = 90 − (60 + 5) = ₹25; primary deficit = 25 − 15 = ₹10. ₹25 is the fiscal deficit itself, ₹15 is the interest bill, and ₹5 is only the non-debt capital receipts.

Q2. Consider the following statements about the effective revenue deficit:
1. It is the revenue deficit minus grants for the creation of capital assets.
2. It was part of the FRBM Act as originally passed in 2003.
Which of the statements given above is/are correct?

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2
Show answer

Answer: A. 1 only

Statement 1 is the correct definition. Statement 2 is wrong: the concept was added by the 2012 amendment, and its target was removed in 2018. So '2 only', 'both' and 'neither' are wrong.

Q3. Which one of the following best describes the fiscal deficit of the Union government?

  1. The excess of revenue expenditure over revenue receipts
  2. The total borrowing requirement of the government in a year
  3. Total expenditure minus total receipts including borrowings
  4. The increase in the RBI's net credit to the government
Show answer

Answer: B. The total borrowing requirement of the government in a year

Fiscal deficit is total expenditure minus revenue and non-debt capital receipts, which equals what must be borrowed. The first option is the revenue deficit, the third is the old budget deficit, and the fourth is the monetised deficit.

Q4. With reference to the FRBM Act as amended in 2018, consider the following statements:
1. Central government debt was to be brought down to 40 per cent of GDP by the end of 2024-25.
2. The target of eliminating the revenue deficit was retained.
3. The escape clause permits a deviation of up to 0.5 per cent of GDP from the fiscal deficit target.
How many of the above statements are correct?

  1. Only one
  2. Only two
  3. All three
  4. None
Show answer

Answer: B. Only two

Statements 1 and 3 are correct. Statement 2 is wrong: the 2018 amendment dropped the revenue deficit and effective revenue deficit targets. So 'only one', 'all three' and 'none' are wrong.

Q5. Consider the following statements:
1. Crowding out refers to a fall in private investment when heavy government borrowing pushes up interest rates.
2. The monetised deficit is the part of the fiscal deficit financed through the National Small Savings Fund.
Which of the statements given above is/are correct?

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2
Show answer

Answer: A. 1 only

Statement 1 is right. Statement 2 is wrong: the monetised deficit is the part met by an increase in the RBI's net credit to the government, not by small savings. So '2 only', 'both' and 'neither' are wrong.

Q6. Match List I with List II:
List I
A. Fiscal deficit
B. Revenue deficit
C. Primary deficit
D. Effective revenue deficit
List II
1. Fiscal deficit minus interest payments
2. Revenue expenditure minus revenue receipts
3. Revenue deficit minus grants for creation of capital assets
4. Total expenditure minus revenue receipts and non-debt capital receipts
Select the correct answer using the code given below:

  1. A-4, B-2, C-1, D-3
  2. A-4, B-3, C-1, D-2
  3. A-1, B-2, C-4, D-3
  4. A-2, B-4, C-1, D-3
Show answer

Answer: A. A-4, B-2, C-1, D-3

The fiscal deficit is formula 4, the revenue deficit 2, the primary deficit 1 and the effective revenue deficit 3. The second code swaps the revenue and effective revenue deficits, the third swaps the fiscal and primary deficits, and the fourth swaps the fiscal and revenue deficits.

Q7. Consider the following statements regarding borrowing by states under Article 293 of the Constitution:
1. A state may borrow only within the territory of India upon the security of its Consolidated Fund.
2. A state that still owes money to the Government of India cannot raise a new loan without the consent of the Government of India.
Which of the statements given above is/are correct?

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2
Show answer

Answer: C. Both 1 and 2

Both are correct: Article 293(1) limits state borrowing to within India on the security of the state's Consolidated Fund, and Article 293(3) requires the Centre's consent while any loan from the Centre is outstanding. So '1 only', '2 only' and 'neither' are wrong.

Q8. The FRBM Review Committee, which recommended debt as the main anchor of fiscal policy and an independent fiscal council, was chaired by:

  1. Bimal Jalan
  2. Y. V. Reddy
  3. N. K. Singh
  4. Urjit Patel
Show answer

Answer: C. N. K. Singh

N.K. Singh chaired the FRBM Review Committee (report January 2017). Bimal Jalan chaired the 2019 committee on the RBI's economic capital framework, Y.V. Reddy chaired the Fourteenth Finance Commission, and Urjit Patel chaired the 2014 expert committee on the monetary policy framework.

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