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Effective Revenue deficit

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Effective Revenue deficit is a new term introduced in the Union Budget 2011-12. While revenue deficit is the difference between revenue receipts and revenue expenditure, the present accounting system includes all grants from the Union Government to the state governments/Union territories/other bodies as revenue expenditure, even if they are used to create assets. Such assets created by the sub-national governments/bodies are owned by them and not by the Union Government. Nevertheless they do result in the creation of durable assets.

According to the Finance Ministry, such revenue expenditures contribute to the growth in the economy and therefore, should not be treated as unproductive in nature. In the Union Budget (2011-12) a new methodology has been introduced to capture the ‘effective revenue deficit’, which excludes those revenue expenditures (or transfers) in the form of grants for creation of capital assets. If this methodology is taken into account, the effective revenue deficit (revised estimates) for 2010-11 is only 2.3 per cent as against the revenue deficit of 3.4 per cent of GDP. The effective revenue deficit for 2011-12 is projected at 1.8 per cent as against the revenue deficit estimates of 3.4 per cent.

It may be noted that even though some grants may be allocated towards the creation of assets, financial allocation does not always result in physical outcomes.

In short, Effective Revenue Deficit is the difference between revenue deficit and grants for creation of capital assets.

Effective revenue deficit has now become a new fiscal parameter and same is targeted to be eliminated by the 31st of March 2015 as per the Amendments to Fiscal Responsibility and Budget Management Act.


Source

  1. Union Budget Documents 2011-12.


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