debt & deficit

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Debt & Deficit are same things?

 No,

-  when you’re spending more than your income = you're in deficit

-  when you borrow money to fill that gap / deficit = you're in debt.

Why deficit?

•  Ideally, Govt. should not spend more than what it earns.

•   but, in real life situation its not that easy.

•  Govt. has to spend crores of s. in military, poverty removal schemes,

floods, draughts, tsunami reliefs etc. so they're bound to run in deficit. !nd

ultimately have to borrow from someone to fill that gap.

Is Deficit bad?

that depends on whether you’re borrowing for "evelopment wor# or not$.

there are % types of Govt. &penditure (spending)

Revenue Expenditure •  = when Govt. spends money paying salaries to its employees.•  or buys some machine guns or missiles.

•  such &penditure is non*productive (Of  course these things are essential to

run the nation, but its 'non-productive' in this classification)

•  this spending "oesn’t create assets+ but money wasted in

o  alary - per#s to Govt. employees

o  !dministration

o  "efense law order 

o  Interest payment on previously borrowed loans

o  ubsidy ** ma0ority of ta payers’ money goes here. (I’ll tal#about subsidy in another article)

*by the way what are assets?

•  !sset is something that generates money. 1or eample you purchase a

house - rent it to someone* then you’re earning money. 2hus its your asset.

•  NP = Non*performing !sset. = its not generating money / ma#ing losses.

(for e.g. you buy house but you neither live in it nor you rent it to others.)

!"rr"wing t" fi## up Revenue deficits is p"is"n"us f"r the hea#th "f nati"n$ %e$g$

urrent#y Revenue deficit "f '( is )+ "f its ,DP-

apita# Expenditure •  3hen Govt. ma#es roads, dams, bridges, ports, schools, etc.

•  such wor# is productive. It will lead to further economic "evelopment.

•  o, if Govt. spends money here - runs into deficit / ta#es debt to finance it

= its not bad. because it'll be recovered later on.

•  e.g. #ids learn in school, they grow up * do some 0ob / business =

ultimately pay taes directly / indirectly thus money is recovered. and so on...

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•  !nother eample, Govt. gives free meal via 4id*day meal schemes. Now

you might thin#, all those #ids are poor, and they’ll never earn enough money

to be in the 5income*ta slabs’ group. o what’s the point in giving them free

food$

•   but no matter how rich / poor those #ids are when they grow up* they’ll

still have to buy things li#e petrol, matchsticks, cinema tickets, milk, food oil,

 soap etc.

•  and on all such things, Govt. ta#es taes (6at, entertainment ta etc.) . o

even if the poor people are not paying direct income ta* they still end up

 paying money to Govt. this is called .indirect /ax0

in short, if Govt. runs into deficit, while paying for the capital formation spending =

good for nation.

1 types "f Deficit?

234 /"ta# "r !udgetary deficit %!D- 

= spending income=2otal &penditure * total receipts 7 (the income of Govt. is written as 5reciepts’)

= 82otal (evenue 9 :apital) &penditure; 4IN

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•  "uring war we need lot money to buy oil, missiles, food /medicines for

army etc.

•   Nations print more money to finance it. (because its hard for a nation to get

loans during war.)

•

  1or &ample, Germany printed more money during 3orld war ? (?J?B*?O)•  ut then Inflation destroyed German money’s value.

•  2hat’s why there will be steep inflation after war. (poor potato.)

•  uic#ly =

during this time, it spoils mar#et with inflation.

o  If you use newly printed money to build a superfast highway (which

ta#es >uite less time compared to "ams) then you’ll recover the money

>uic#ly.o  !gain you might thin# how can Govt. recover money used in

 building roads$

o  !ns* more roads = more transport - business = more ales / &cise

/ G2 / 6!2 etc taes. 

•  Import of luury items must be discouraged 

o  uppose you’re a road contractor, and Govt. gave you payment for 

 building a highway.

o  ut you use that money to buy epensive imported perfumes / gold

watches/ i*podsQ

o  that doesn’t help the Indian &conomy. 2hat’s why. 

 Now moving to another part*

Pub#ic Debt

When d"es ,"vt$ b"rr"w fr"m pub#ic? ?.  3hen Govt. doesn’t have enough surplus money.

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%.  3hen 2aes can’t be increased beyond a level (not li#e you can as# every

middle*class man to pay ? Ea#h rs. 2o help build the dams/highways)

A.  3hen printing more money is ma#ing inflation (after safe limit)

@"w d"es ,"vt$ b"rr"w fr"m pub#ic?

-  ne eample is y issuing

o  Fisan 6i#as @atra,

o  Indira vi#as  patra

o   Narmada 6i#as  patra

o  2he money gathered from such certificates is used for building

dams - other things.

o  !nd the advantage is, Govt. will double your money after some ?*

?D*% years. o Govt. doesn’t have to repay you interest every month /

year.

o  o its in a way* loan ta#en from you (the public) by the Govt.

Aia /reasury bi##s-  here I (have to) buy Govt. treasury bills* gives money to Govt. - sells

these bills in :apital mar#et+.

-  3hen you buy a Govt. security* you can be sureR its safe and give you

good profit* that’s why its called .,i#d Edged marBet0

-  It deals with Govt. - semi Govt. securities

-  Generally commercial ban#s (have to) purchase Govt. securities

(remember the ER statutory li>uidity ratio)

-  E = ban#s to invest a certain percentage of their liabilities in

government securities the rate was

o  AO.D per cent in ?JJo  %D per cent in ?JJP

- 

+Swill write in detail about capital mar#et, in another articleT

What0s the /reasury bi##?

-  3hen Govt. has small temporary gap/deficit in the evenue part, it’ll sell

the treasury bills to I.

-  I has to buy it. (because there is some law / deal)

-  2hen I sells it to :ommercial an#s (thus recovers money)

-  ut here as you can see money is 0ust printed / given without actual

creation of any direct 5physical product’ so this is bad for economy in long run. 

Debt trap

3hen you borrow 0ust to pay your previous debts.

2hat is the act of borrowing money 0ust to #eep up with debt servicing+

+"ebt servicing = interest 9 installment payment%6R!8- 6isca# Resp"nsibi#ity C !udget 8anagement !i## %5-

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-  It was made to eliminate fiscal deficit

-  It put limits on central government’s borrowings,  debt,  deficits

-  It said that total liabilities of central government should not eceed D per

cent of G"@. (it was PUV in %%.)

-  Kowever its provisions are diluted now, because Govt. had to pay lot

money due to Uth pay :ommission / debt waiver - recession.