Effective Revenue Deficit

The definition of the revenue expenditure is that it must not create any productive asset. However, this creates a problem in accounts. There are several grants which the Union Government gives to the state / UTs and some of which do create some assets, which are not owned by union government but by state government. For example, under the MGNREGA programme, some capital assets such as roads, ponds etc. are created, thus the grants for such expenditure will not strictly fall in the revenue expenditure.

So, to do away with such anomaly, the government introduced the Effective Revenue Deficit concept from Union Budget 2010-11. From 2012-13 onwards the Effective Revenue Deficit is being brought in as a fiscal parameter.

Definition and logic behind Effective Revenue Deficit

Effective Revenue Deficit is the difference between revenue deficit and grants for creation of capital assets. In other words, the Effective Revenue Deficit excludes those revenue expenditures which were done in the form of grants for creation of capital assets aka GoCA. Such grants include the grants given under:

  • Pradhan Mantri Gram Sadak Yojana
  • Accelerated Irrigation Benefit Programme
  • Jawaharlal Nehru National Urban Renewal Mission
  • MGNREGA etc.

The logic is clear; these expenses despite being shown in the accounts as Revenue Expenditures, are involved with asset creation and cannot be considered completely ‘unproductive’.

India’s Effective Revenue Deficit?

According to the Interim Budget 2014-15 documents, the Effective revenue deficit is 2.2 % of the GDP and the government projects it to be 1.8% of GDP in fiscal year 2014-15.

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