Budget deficits

Public Finance Including Government Budgeting 21.13
Budget Deficit, the Monetised Deficit or the net RBI credit to the Government and RBI's Support in
Primary issues of Central Government Securities
Perhaps it is necessary to clarify the three concepts viz. the Budget Deficit, the Monetised Deficit
or the net RBI credit to the Government and RBI’s support in primary issues of Central Government
securities. The Budget Deficit is defined as the total of the net issue of 91-day Treasury Bills (at
face value) — ad hoc, tap and auction — net of increase Central Government balances during the
financial year. Therefore, conceptually Budget Deficit is the short term financing availed of by the
Central Government both from the Reserve Bank and other entities which include banks, financial
institutions, State Governments, corporates and other parties. In this set up, the Reserve Bank is
only one of the financing units of Budget Deficit.
Net Reserve Bank credit to the Centre, on the other hand, includes not only the Reserve Bank’s
holding of 91–day T-Bills but also its holding of dated securities and rupee coins net of increase in
Central Government’s cash balances. In other words, the Reserve Bank’s holding of 91-day T-Bills
that forms a part of Budget Deficit is also a subset of the monetised deficit. However, it may be noted
that while the constituents of Budget Deficit are measured at face value, those of the net Reserve Bank
credit to the Centre are measured at book value. This valuation difference is, however, negligible
particularly for 91-day T-Bills.
The correlation between the Budget Deficit and the monetised deficit gets weakened at times of
easy liquidity such as during the current financial year as market absorption of Government securities
including 91-day T- bills have gone up substantially. The purchase of Government securities by
non - RBI entities reduces the monetised deficit in two ways: (i) directly by reducing devolvement
on the Reserve Bank in 91-day T-Bills and dated securities auctions as well as through the sale of
dated securities including repos and ii) indirectly, as the market off-take of Tap T-Bills and fresh
Government securities improves the Centre’s cash balances and reduces the Centre’s recourse to ad
hocs.
The RBI’s support to primary issues of Central Government securities reflects only its support
in the primary offers and net RBI credit to Government could be very different due to other factors.
For example: in 1993-94, RBI’s support to Government was ` 7014 crore, but, net RBI credit was
only ` 260 crores. In 1996-97, till February 14th, RBI support was ` 12,099 crore, but, net RBI
credit was only ` 7,837 crore. Monetised deficit is one source of money supply and not the only
factor affecting money supply.
It is sometimes argued that the real instrument for fiscal prudence should be a statutory ceiling on
debt. Our Constitution enables a Parliamentary legislation relating to a ceiling on debt. But, clearly
the new system has merit by itself and co-exist more effectively with a ceiling on debt. It has merit
in itself since it seeks to limit the extent of RBI’s support. Technically, there is nothing to stop the
Government from accessing all the debt within the ceiling from RBI if the new system does not
exist.Aceiling on debt provides a constraint on the broader issue of debt management and impinges
on fiscal policy more directly. The new system tackles the issue of fiscal-monetary interface which
is a critical component of both fiscal and monetary policies.

21.14 Indian Economy
It is sometimes argued that the degree of autonomy for monetary policy is still limited. To the
extent the limits on WMA interest costs and RBI’s support to Government are negotiable during the
transition, there is room for Government influencing the RBI. The main difference is that under the
earlier system of automatic monetisation Government could unilaterally determine the limits, while
after the new system becomes fully functional, the pattern similar to State Governments would be
followed.
Ways and Means Advances (WMA)
Under Section 17(5) of RBI Act, 1934, the RBI provides Ways and Means Advances (WMA) to
the States banking with it to help them to tide over temporary mismatches in the cash flow of their
receipts and payments. Such advances, are under the Act, repayable in each case not later than three
months from the date of making that advance’. There are two types of WMA — normal and special.
While normal WMA are clean advances, special WMA are secured advances provided against the
pledge of Government of India dated securities. The operative limit for special WMA for a State is
subject to its holdings of Central Government dated securities upto a maximum of limit sanctioned.
In addition, the RBI has determined limits for normal and special WMA for each State as multiples
of the prescribed minimum balance required to be maintained with the RBI by that State. These limits
have been revised periodically. The present limits, effective from August 1, 1996 work out to an
aggregate of ` 3,085.60 crore – ` 2,234.40 crore (normal WMA) and ` 851.20 crore (special WMA).
Overdraft Regulation Scheme
Any amount drawn by a State in excess of WMA is an overdraft. As per the Overdraft Regulation
Scheme, in force from October 2, 1985, no State was allowed to run an overdraft with the RBI for
more than seven continuous working days. In case an overdraft appeared in the State’s account and
remained beyond seven continuous working days, the RBI and its agencies stopped payments on
behalf of the State. On a further review of the Overdraft Regulation Scheme in 1993, the time limit
for clearance of overdraft was increased from seven consecutive working days to ten consecutive
working days with effect from November 1, 1993. This position continues.
At the instance of Governments of Assam and Manipur, RBI has agreed to a ceiling on their
overdrafts at ` 252 crore and ` 10 crore, respectively. If this ceiling is exceeded even within a time
frame of ten consecutive working days as stipulated under the Overdraft Regulation Scheme, the
RBI suspends payments on behalf of these State Governments.
Monitoring of WMA Overdrafts and Enforcement of Stoppage of Payments
The position of WMA actually utilised and overdrafts of various States is closely monitored in the
Internal Debt Management Cell (IDM Cell), RBI, on a daily basis on receipt of the position from
Central Accounts Section (CAS), RBI, Nagpur. When a State avails of WMA in excess of 75 per
cent of the aggregate limit (aggregate = normal plus operative limit for special WMA), the State
is cautioned to take remedial measures to avoid emergence of overdraft in its account. Whenever a
State, after availing of normal and special WMA, emerges in overdraft, the IDM Cell conveys, by
facsimile message, the position of its overdraft to the concerned State on a daily basis, with a request
to clear it within a period not exceeding ten consecutive working days. If the account of a State

continues to be overdrawn on the eleventh continuous working day, the RBI suspends payments on
behalf of the State until the overdraft is cleared.
Interest Rate on WMA and Overdrafts
The interest rate charged on WMA and overdrafts at present are the Bank Rate (9 per cent) and the
Bank Rate plus two percentage points (11 per cent), respectively.
Surplus Investments
The RBI acts as the sole agent for investment of the State’s surplus funds. Surplus cash balance of a
State beyond a level indicated by it is automatically invested in 14-day intermediate Treasury bills,
on which, the rate of interest at present is 6 per cent. The States are also free to participate in 14-day
and 91-day Treasury bills auctions as non-competitive bidders for investment of their durable surplus.
Central Plan
Central or annual plans are essentially the five year plans broken down into five annual instalments.
Through these annual plans the government achieves the objectives of the Five-Year Plans. The
funding of the central plan is split almost evenly between government support (from the budget)
and internal and extra budgetary resources of public enterprises. The government’s support to the
central plan is called the budget support.
Bharat Nirman
Bharat Nirman is the UPA-II government’s ambitious programme for building infrastructure,
especially in rural India. It has six components — irrigation, roads, water supply, housing, rural
electrification and rural telecom connectivity. In each of these areas, the government has set targets
that are to be achieved by the year 2009, within four years of its launch.
Cess
This is an additional levy on the basic tax liability. Governments resort to cesses for meeting specific
expenditure. For instance, both corporate and individual income is at present subject to an education
cess of 2%. In the last Budget the government had imposed an another 1% cess ‘Secondary and
higher education cess on income tax’ to finance secondary and higher education.
Countervailing Duties (CVD)
Countervailing duty is a tax imposed on imports, over and above the basic import duty. CVD is at
par with the excise duty paid by the domestic manufacturers of similar goods. This ensures a level
playing field between imported goods and locally produced ones. An exemption from CVD places
domestic industry at disadvantage and over long run discourages investments in affected sectors.
Export Duty
This is a tax levied on exports. In most instances the object is not revenue but to discourage exports
of certain items. In the last Budget, for instance, the government imposed an export duty of ` 300
per metric tonne on export of iron ores and concentrates and ` 2,000 per metric tonne on export of
chrome ores and concentrates.

Pass-Through Status
A pass through status helps avoid double taxation. Mutual funds, for instance, enjoy pass through
status. The income earned by the funds is tax-free. Since mutual funds’income is distributed to unit
holders, who are in turn taxed on their income from such investments, any taxation of mutual funds
would amount to double taxation. Essentially, it means that the income is merely passing through
the MFs and, therefore, should not be taxed. The government allows VC funds in some sectors pass-
through status to encourage investments in start-ups.
Subvention
The term subvention finds a mention in almost every Budget. It refers to a grant of money in aid or
support, mostly by the government. In the Indian context, for instance, the government sometimes
asks institutions to provide loans to farmers at below market rates. The loss is usually made good
through subventions.
Surcharge
Surcharge is an additional charge or tax. A surcharge of 10% on a tax rate of 30% effectively raises
the combined tax burden to 33%. In the case of individuals earning a taxable salary of more than `
10 lakh a surcharge of 10% is levied on income in excess of ` 10 lakh.
State Finance: Agreements with RBI: Main Provisions
A State entrusts its banking business to the RBI by voluntarily entering into an agreement
under Section 21A of the Reserve Bank of India Act, 1934. Twenty-three States entered in to
such agreements with the RBI to undertake general banking business in India, including payments,
receipts, collection, remittance of money, management of public debt and issue of new loans. Two
States — Jammu & Kashmir and Sikkim — have agreements with the RBI only for the limited
purpose of managing their public debt. The RBI is not entitled to any remuneration for the conduct
of ordinary banking business other than the advantages which may accrue to it from the holding
of their cash balances free of obligation to pay interest thereon. Maintenance of such interest-free
balances are subject to periodic agreements between the States and the RBI. The RBI advises the
States about their daily cash balance at the close of each working day.
Budget Concepts
Expenditure Budget: It contains expenditure estimates made for a scheme or programme under
both revenue and capital heads. These estimates are brought together and shown on a net basis at
one place by major heads.
Finance Bill: Finance Bill is a Money Bill which contains the government’s proposals for levy of
new taxes, modification of the existing tax structure or continuance of the existing tax structure
beyond the period approved by Parliament. It is submitted to Parliament along with the Budget
for its approval Finance Bill. At the time of presentation of the Annual Financial Statement before
Parliament, a Finance Bill is also presented, detailing the imposition, abolition, remission, alteration

or regulation of taxes proposed in the Budget. It is accompanied by a Memorandum explaining the
provisions included in it.
Fiscal Deficit: Fiscal Deficit is the difference between the revenue receipts plus certain non-debt
capital receipts and the total expenditure including loans (net of repayments). This indicates the total
borrowing requirements of the government from all sources.
Fiscal Deficit = Total expenditure — Revenue receipt — Recovery of loans — Other receipt
Monetised Deficit: Monetised Deficit indicates the level of support extended by the Reserve Bank
of India to the government’s borrowing programme by way of printing of new money.
Non-Plan Expenditure: Non-plan expenditure includes both revenue and capital expenditure on
interest payments, the entire defence expenditure (both revenue and capital expenditure), subsidies,
postal deficit, police, pensions, economic services, loans to public enterprises and loans as well as
grants to state governments, union territory governments and foreign governments.
Plan Expenditure: Plan expenditure includes both revenue and capital expenditure of the government
on the Central Plan, Central assistance to state and union territory plans. It forms a sizeable proportion
of the total expenditure of the Central government.
Public Account: Public account is an account in which money received through transactions
not relating to the Consolidated Fund is kept. Besides the normal receipts and expenditure of
the government relating to the Consolidated Fund, certain other transactions enter government
accounts in respect of which the government acts more as a banker, for example, transactions
relating to provident funds, small savings collections, other deposits, etc. Such money is kept in the
Public Account and the connected disbursements are also made from it. Public Account funds do
not belong to the government and have to be paid back sometime or the other to the persons and
authorities who deposited them. Parliamentary authorisation for payments from the Public Account
is, therefore, not required. Moneys held by Government in Trust as in the case of Provident Funds,
Small Savings collections, income of Government set apart for expenditure on specific objects like
road development, primary education, Reserve/Special Funds, etc., are kept in the Public Account.
Annual Financial Statement: Annual Financial Statement shows estimated receipts and expenditure
of the Government. The receipts and disbursements are shown under the three parts, in which
Government Accounts are kept, viz. (i) Consolidated Fund, (ii) Contingency Fund, and (iii) Public
Account.
Appropriation Bill: It is a Money Bill presented to Parliament for its approval, so that the government
can withdraw from the Consolidated Fund the amounts required for meeting the expenditure
charged on the Consolidated Fund. No amount can be withdrawn from the Consolidated Fund till
the Appropriation Bill is voted and enacted.
Capital Budget: Capital Budget consists capital receipts and capital payments. The capital receipts
are loans raised by Government from public, called market loans, borrowings by Government
from Reserve Bank and other parties through sale of Treasury Bills, loans received from foreign

Governments and institutions, disinvestment receipts from public enterprises and recoveries of
loans from State and Union Territory Governments and other parties. Capital payments consist of
capital expenditure on acquisition/building of assets like land, buildings, machinery, equipment, as
also investments in shares, etc., and loans and advances granted by Central Government to State and
Union Territory Governments, Government companies, Corporations and other parties.
Charged Expenditure: Charged expenditure consists of expenses which do not require the
sanction of Parliament, such as the emoluments of the President of India, Judges of the Supreme
Court, etc.
Central Plan: It consists of the government’s budget support to the Plan and the internal and extra
budgetary resources raised by public enterprises.
Consolidated Fund: Consolidated Fund is made up of all revenues received by the government,
loans raised by it, and also its receipts from recoveries of loans granted by it. All expenditure of
the government is incurred from the Consolidated Fund and no amount can be withdrawn from the
Fund without authorisation from Parliament.
Contingency Fund: Contingency Fund is an imprest held on behalf of the President by a Secretary to
the Government of India in the Ministry of Finance, and is used by the Government for the purposes
of meeting all its urgent and unforeseen expenditure. Parliamentary approval for such expenditure
and for withdrawal of an equivalent amount from the Consolidated Fund to recoup the Contingency
Fund is subsequently obtained. The corpus of the Contingency Fund as authorised by Parliament
presently stands at Rs. 500 crore.
Primary Deficit: It is the difference between fiscal deficit and interest payments.
Primary Deficit = Fiscal Deficit – Interest payment
Demands for Grants: The estimates of expenditure from the Consolidated Fund included in the
Annual Financial Statement and required to be voted by the Lok Sabha are submitted in the form of
Demands for Grants. Generally, one Demand for Grant is presented in respect of each Ministry or
Department. In regard to Union Territories without Legislature, a separate Demand is presented for
each of the Union Territories. In the Union Budget for 2013-14 there are 106 Demands for Grants.
Each Demand first gives the totals of ‘voted’ and ‘charged’ expenditure as also the ‘revenue’ and
‘capital’ expenditure included in the Demand separately, and also the grand total of the amount of
expenditure for which the Demand is presented. This is followed by the estimates of expenditure
under different major heads of account. The breakup of the expenditure under each major head
between ‘Plan’ and ‘Non-Plan’ is also given.
MODVAT: MODVAT stands for Modified ValueAdded Tax which was introduced in India in 1986.
MODVAT Scheme essentially follows VAT Scheme of taxation, i.e. if a manufacturer A purchases
certain components (raw materials) from another manufacturer B for use in its product, B would have
paid excise duty on components manufactured by it and would have recovered that excise duty in its
sales price from A. Now, A has to pay excise duty on product manufactured by it as well as bear the

Budget deficits

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