Fiscal System & Policy Tools

Fiscal System & Policy Tools

Fiscal System

• It refers to the management of revenue and capital expenditure finances by the state.

• Hence, the fiscal system includes budgetary activities of the government, that is, revenue raising, borrowing, and spending activities.

Fiscal Policy

• Fiscal policy refers to the use of taxation, public expenditure, and the management of public debt in order to achieve certain specified objectives.

• The Indian fiscal system includes or refers to the management of revenue sources and expenditure of the Central and State governments, public debt, deficit financing, budget, tax structure, etc.

Sources of Revenue for the Centre

The revenue of the Central Government consists of the following elements:

1. Tax revenue

Tax revenue comes broadly from three sources—

(a) Taxes on income and expenditure

(b) Taxes on property and capital transactions

(c) Taxes on commodities and services

2. Non-tax revenue

Non-tax revenue consists of—

(a) Currency, coinage, and mint

(b) Interest receipts and dividends, and other non-tax revenue

Sources of Revenue for the State

The main sources are—

(a) State tax revenue

(b) Share in central taxes

(c) Income from social, commercial, and economic services and profits of state-run enterprises

State tax revenue includes, among others, land revenue, stamp, registration, and estate duty, etc.

Expenditure of the Centre

The central government makes expenditures broadly under two heads:

1. Plan expenditure

• Outlay for agriculture, rural development, irrigation and flood control, energy, industry and minerals, transport, communications, science and technology, environment and economic services, etc.

2. Non-plan expenditure

• The major non-plan expenditures are interest payments, defense, subsidies, and general services.

Expenditure of the State

Like the Union Government, the State Governments, too, have two broad heads of expenditure:

(a) Non-Development Expenditure

(b) Development Expenditure

Public Debt of the Government of India

Public debt of the government of India is of two kinds: internal and external.

Internal debt

• It comprises loans raised from the open market, compensation bonds, prize bonds, etc., treasury bills issued to the RBI, commercial banks, etc.

External debt

• It consists of loans taken from the World Bank, the IMF, the ADB, and individual countries like the USA, Japan, etc.

Deficit Financing

Deficit Financing is a fiscal tool in the hands of the government to bridge the gap between revenue receipts and revenue expenditure

In a budget statement, there is a mention of four types of deficits:

1. Revenue Deficit

2. Budget Deficit

3. Fiscal Deficit

4. Primary Deficit

1. Revenue Deficit

• It refers to the excess of revenue expenditure over revenue receipts.

• [In fact, it reflects one crucial fact: if the government is borrowing to pay the house rent, then you are in a situation of revenue deficit, i.e., while you are borrowing and spending, you are not creating any durable asset. This implies that there will be a repayment obligation (sometime in the future), and at the same time, there is no asset creation via investment.

• Formula:

Revenue Deficit = Total Revenue Expenditure – Total Revenue Receipts

      = Non-plan Expenditure + Plan Expenditure - (net tax revenue + non-tax revenue)

2. Budget Deficit

• Budget deficit refers to the excess of total expenditure over total receipts.

• Here, total receipts include current revenue and net internal and external capital receipts of the government.

• Formula:

Budget Deficit = Total Expenditure - Total Receipts

   = (non-plan expenditure + plan expenditure) - (Revenue Receipts + Capital Receipts)

3. Fiscal Deficit

• It refers to the difference between total expenditure (revenue, capital, and loans net of repayment) and revenue receipts plus all capital receipts (not borrowings).

• Formula:

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)

4. Primary Deficit

• Primary deficit refers to fiscal deficit minus interest payments.

• It shows how much the government is borrowing to pay for expenses other than interest payments.

• It also indicates how much the government is adding to the future repayment burden.

• Formula:

Primary Deficit = Revenue Deficit - Interest Payments

Monetized Deficit = Increment in Net RBI Credit to the Central Government.

Final Thoughts

The fiscal system of India plays a vital role in balancing revenue and expenditure through the effective use of fiscal policy tools. By managing tax and non-tax revenues, along with plan and non-plan expenditures, the government ensures the smooth functioning of the economy. The reliance on public debt (internal and external) highlights the need for sustainable borrowing practices.

Tools like deficit financing help bridge gaps, but excessive use may create long-term burdens. The classification of deficits—revenue, budget, fiscal, and primary—provides a clear picture of economic health and financial discipline.

A high revenue deficit implies borrowing for non-asset creation, while a large fiscal deficit signals heavy dependence on borrowings. Managing the primary deficit is essential to reducing future repayment pressures.