Government Budget and the Economy
What this domain tests
This domain tests budget receipts and expenditure, revenue and capital classifications, and the meaning and calculation of revenue deficit, fiscal deficit and primary deficit.
Core rules
- Revenue receipts: tax and non-tax receipts that do not create liabilities or reduce assets.
- Capital receipts: borrowings, disinvestment and recoveries of loans; they create liabilities or reduce assets.
- Revenue expenditure: does not create assets or reduce liabilities. Capital expenditure: creates assets or reduces liabilities.
- Revenue deficit = revenue expenditure − revenue receipts.
- Fiscal deficit = total expenditure − total receipts excluding borrowings.
- Primary deficit = fiscal deficit − interest payments.
Worked example
Total expenditure = ₹800 crore; revenue receipts = ₹400 crore; capital receipts = ₹300 crore, including borrowings of ₹200 crore. Non-debt receipts = 400 + (300 − 200) = ₹500 crore. Fiscal deficit = 800 − 500 = ₹300 crore. If interest payments are ₹100 crore, primary deficit = 300 − 100 = ₹200 crore.
Traps that cost marks
Do not treat borrowings as revenue receipts. Disinvestment is a capital receipt, not revenue. Fiscal deficit is not the same as revenue deficit. Interest payments are part of revenue expenditure, so they affect the primary deficit calculation. A fiscal deficit can be used for capital formation, so it is not automatically wasteful.