Chapters :

Public Finance - 02


Traditional or General Budget

The initial structure of the present day general budget is known as Traditional Budget. The main aim of the General Budget is to set up the financial control over Executive and the Legislative. This budget contains the details of income and expenditure of the Government.

Performance Budget: When the outcome of any activity is taken as the base of any budget, such budget is known as ‘Performance Budget’. For the first time in the world, the performance budget was made in USA. It is the compulsion of the government to tell that ‘what is done’, ‘how much done’ by it for the betterment of the people. In India, the Performance Budget is also known as ‘Outcome Budget’.

Zero Based Budgets:

There are two primary reasons for adopting this type of Budget.

  • The continuous revenue deficit in the budget of the country.
  • (ii) Poor implementation of the Performance Budget.

Under Zero based budgets, every activity is decided based on Zero basis i.e. the previous expenditures are not considered. This budget is also known as ‘Sun Set Budget’ which means the finance department has to present the zero based budget before the end of the financial year.

Gender Budget

If a budget describes the schemes and plans for the welfare of children and females, it is known as Gender Budget. Through Gender Budget, the Government declares an amount to be spent over the development, Welfare, Empowerment schemes and programmer for Females.

Balanced budget

When total public sector spending equals total government income (revenue receipts) during the same period from taxes ad charges for public services. It is a budget with zero deficit is balanced budget.

Outcome – Output framework

This concept was introduced in 2019-20. It is a framework of measurable indicators has been put in place, monitoring the objectives (outcomes) of the central sector and centrally sponsored schemes which account for around 40% of government budget expenditure. It is a governance based model. It necessitates active tracking of targets achieved against defined targets. It benefits by enhancing the transparency and accountability.



Every form of money generation in the nature of income, earnings are
revenue for a firm or a government which do not increase financial liabilities of the government, i.e., the tax incomes, non-tax incomes along with foreign grants.


Every form of money generation which is not income or earnings for a firm or a government (i.e., money raised via borrowings) is considered a non-revenue source if they increase financial liabilities.

Government receipts are divided into two groups


Every receiving or accrual of money to a government by revenue and     non-revenue sources is a receipt. Their sum is called total receipts. It includes all incomes as well as non-income accruals of a government.

Revenue Receipts and Capital Receipts:


Government receipts which neither (i) create liabilities nor (ii) reduce assets are called revenue receipts.

These are proceeds of taxes, interest and dividend on government investment, cess and other receipts for services rendered by the government.

Capital Receipts

Government receipts which either (i) create liabilities (e.g. borrowing) or (ii) reduce assets (e.g. disinvestment) are called capital receipts.

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 bodies,

Disinvestment receipts and recoveries of loans from State and Union Territory Governments and other parties.


Simply put, an expenditure which neither creates assets nor reduces liability is called Revenue Expenditure.  e.g., salaries of employees, interest payment on past debt, subsidies, pension, etc.

An expenditure which either creates an asset (e.g., school building) or reduces liability (e.g., repayment of loan) is called capital expenditure.


When government’s income is greater than its expenditure it will have a surplus budget. If government’s expenditure in equal to its income, it will be a balanced budget. If it is greater than its income, it will be a deficit budget.

Revenue Deficit:

The revenue deficit refers to the excess of government’s revenue expenditure over revenue Receipts.

Revenue Deficit = Revenue expenditure – Revenue Receipts

Revenue Deficit implies that the governments will have to borrow not only to finance its investment and also its Consumption expenditures.

Effective Revenue Deficit = Revenue Deficit – Grants for Creation of Capital assets.

Fiscal Deficits:

Fiscal Deficits is the difference between the government’s total expenditure and its total receipt excluding borrowing.

Fiscal deficit = Total expenditure – (Revenue Receipt + Non  debt creating capital receipt)

The Fiscal deficit will have to be financed through Borrowing. Thus it indicates the total borrowing requirements of the Government from all Sources.

Primary Deficit:

If the Government continues to borrow year after year, it leads to accumulation of debt and the government has to pay more and more interest. The goal of measuring primary deficit is to focus on present fiscal imbalances.

Primary Deficit = Fiscal Deficit – Interest to be paid on previous loans.

Deficit Financing :

Budgetary deficit must be financed by either taxation or borrowing or printing money. Government have mostly relied on borrowing.

Deficit financing is the budgetary situation where expenditure is higher than the revenue. It is a practice adopted for financing the excess expenditure with outside resources. The expenditure revenue gap is financed by either printing of currency or through borrowing.

Nowadays most governments both in the developed and developing world are having deficit budgets and these deficits are often financed through borrowing. Hence the fiscal deficit is the ideal indicator of deficit financing.

In India, the size of fiscal deficit is the leading deficit indicator in the budget. It is estimated to be 3.9 % of the GDP (2015-16 budget estimates). Deficit financing is very useful in developing countries like India because of revenue scarcity and development expenditure needs.

Various indicators of deficit in the budget are:

  1. Budget deficit =      total expenditure – total receipts
  2. Revenue deficit =    revenue expenditure – revenue receipts
  3. Fiscal Deficit = total expenditure – total receipts except borrowings
  4. Primary Deficit = Fiscal deficit- interest payments
  5. Effective revenue Deficit-= Revenue Deficit – grants for the creation of capital  assets
  6. Monetized Fiscal Deficit = that part of the fiscal deficit covered by borrowing from    the RBI.

Simply budget deficit is printing money to finance a part of the budget. In India, there is no budget deficit at present. Hence one there is no budget deficit entry in Government’s budget. Another absent deficit identity is monetized fiscal deficit. This is borrowing by the government from RBI to finance the budget. Such a borrowing practice is not adopted in India from 1997 onwards. Hence the monetized fiscal deficit is also not there.

The leading deficit indicator and also the best one to measure the health of the budget in the Indian context is fiscal deficit. The fiscal deficit represents borrowing by the government. This borrowing is made by the government mostly from the domestic financial market by issuing bonds or treasury bills.

The root factor that cause deficit in the budget is the revenue deficit. Revenue deficit is the difference between revenue receipts and revenue expenditure in an accounting sense.

In recent years, government is following another deficit term called effective revenue deficit. Actually, revenue expenditure indicates expenditure to finance day to day functions of the government. They are not productive. But according to the government some revenue expenditure creates assets and hence is productive. This revenue expenditure which creates assets is deducted to get Effective Revenue Deficit.


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