Worked example 12 — Reading Budget at a Glance and computing the four deficits

A deficit is not a single number. The Budget publishes four, and each is the same table read with different items excluded. An examiner who asks for the deficit is asking which one, and why. This example computes all four from one table, and then reads four conclusions off them.

Before the deficits, the classification. The Union Budget divides two ways at once — revenue against capital, and receipts against expenditure — giving four boxes.

Revenue Budget consists of the revenue receipts of the Government, tax revenues and non-tax revenues, and the revenue expenditure. Revenue expenditure is for the normal running of Government Departments and for rendering of various services, making interest payments on debt, meeting subsidies, grants-in-aid and so on; the test is stated broadly — expenditure which does not result in creation of assets for the Government of India is treated as revenue expenditure.

Capital Budget: capital receipts and capital payments together. Capital receipts are loans raised by the Government, termed market loans, borrowings through the sale of Treasury Bills, loans received from foreign Governments and bodies, recoveries of loans from State and Union Territory Governments and other parties, and miscellaneous capital receipts. Capital payments consist of capital expenditure on acquisition of assets like land, buildings, machinery and equipment, as also investments in shares, and loans and advances granted by the Central Government.

The one refinement that decides two of the four deficits. All grants given to the State Governments, Union Territories and other parties are treated as revenue expenditure in the books of the Union Government even though some of the grants may be used for creation of capital assets by the grantee bodies. The Union's books classify by who holds the asset, not by what the money builds.

And the trap: borrowing is a receipt but not income. Every deficit measure below turns on that sentence.

From Budget at a Glance 2026-27, in ₹ crore, with the percentage of GDP in brackets where the document gives it:

| | Actuals FY 2024-25 | RE 2025-26 | BE 2026-27 | |---|---|---|---| | Total receipts / Total expenditure | 46,52,867 | 49,64,842 | 53,47,315 | | On revenue account | 36,00,914 | 38,69,087 | 41,25,494 | | — of which interest payments | 11,15,575 | 12,74,338 | 14,03,972 | | — of which grants for creation of capital assets | 2,72,656 | 3,08,151 | 4,92,702 | | On capital account | 10,51,953 | 10,95,755 | 12,21,821 | | Effective capital expenditure | 13,24,609 | 14,03,906 | 17,14,523 | | Revenue deficit | 5,64,296 (1.7) | 5,26,764 (1.5) | 5,92,344 (1.5) | | Effective revenue deficit | 2,91,640 (0.9) | 2,18,613 (0.6) | 99,642 (0.3) | | Fiscal deficit | 15,74,431 (4.8) | 15,58,492 (4.4) | 16,95,768 (4.3) | | Primary deficit | 4,58,856 (1.4) | 2,84,154 (0.8) | 2,91,796 (0.7) |

The document notes that RE 2025-26 is adjusted by ₹9,084 crore on account of a net amount receivable by the Centre from the States for prior years.

Check the columns before using them. Revenue account plus capital account: 41,25,494 + 12,21,821 = 53,47,315 — exactly the total expenditure. Good. And effective capital expenditure: 12,21,821 + 4,92,702 = 17,14,523 — exactly the published figure. Both identities hold, which tells you the columns have been read correctly.

(a) Fiscal Deficit. The difference between total expenditure and total receipts excluding debt capital receipts. It is reflective of the total borrowing requirement of Government. In the Budget's own formula it is total expenditure less revenue receipts, recovery of loans and other receipts.

This is the headline measure, and its meaning is exact: how much the Government must borrow this year. Debt receipts are excluded from the receipts side precisely because counting borrowing as income would make every budget balance by definition.

BE 2026-27: ₹16,95,768 crore, 4.3 per cent of GDP.

(b) Revenue Deficit. The excess of revenue expenditure over revenue receipts.

BE 2026-27: ₹5,92,344 crore, 1.5 per cent.

The distinction from the fiscal deficit is what examiners test. A fiscal deficit incurred to build a road leaves behind an asset; a revenue deficit means the Government is borrowing to meet its running costs. Borrowing to invest can be defended; borrowing to pay salaries and interest cannot be sustained.

(c) Effective Revenue Deficit. The difference between the revenue deficit and grants-in-aid for creation of capital assets.

Compute it: 5,92,344 − 4,92,702 = 99,642, exactly the published figure, 0.3 per cent of GDP.

This measure exists to correct the accounting quirk of step 1. Grants to States are booked as revenue expenditure in the Union's accounts even when the State builds an asset with them; the ERD adds those grants back, to show the revenue deficit that is genuinely consumption.

(d) Primary Deficit. Fiscal deficit less interest payments.

Compute it: 16,95,768 − 14,03,972 = 2,91,796, exactly the published figure, 0.7 per cent of GDP.

Interest is the cost of past borrowing, over which this year's government has no control. Stripping it out shows whether current policy is adding to the debt burden independently of the debt already inherited. A primary surplus alongside a fiscal deficit would mean the deficit is entirely the legacy of earlier borrowing.

(e) And the mirror-image measure. Effective Capital Expenditure = capital expenditure + grants-in-aid for creation of capital assets — the same correction as the ERD, applied on the expenditure side. 12,21,821 + 4,92,702 = 17,14,523.

Two of the four deficits are computable from the other rows. That is worth practising: given the fiscal deficit, the revenue deficit, interest and asset-creating grants, the ERD and the primary deficit follow by subtraction, and an examiner may give you exactly that.

(a) Interest is the single largest revenue item. At ₹14,03,972 crore in BE 2026-27 it exceeds the entire capital account of ₹12,21,821 crore. The Government pays more to service past borrowing than it spends on creating assets. Interest is 34.0 per cent of the revenue account and 26.3 per cent of total expenditure — both figures derived by division from the table above, not published in it.

(b) The primary deficit is small; the fiscal deficit is not. A fiscal deficit of 4.3 per cent of GDP alongside a primary deficit of 0.7 per cent means that roughly five-sixths of this year's borrowing is attributable to interest on debt already incurred. Interest is 82.8 per cent of the fiscal deficit, again a derived ratio. That is the practical meaning of a debt burden: policy today is nearly balanced, and the gap is inherited.

(c) The ERD has fallen far faster than the RD. From 0.9 per cent (FY25 actuals) to 0.3 per cent (BE 2026-27) while the revenue deficit went 1.7 → 1.5 → 1.5. The reason is arithmetically visible in the table: grants for creation of capital assets nearly doubled, from ₹2,72,656 crore to ₹4,92,702 crore. More of the Union's revenue spending is now money the States turn into assets — which is why the ERD, not the RD, is the honest measure of consumption borrowing in a federal system.

(d) The three columns are three different kinds of number. Actuals, revised estimates, budget estimates. Never present a budget estimate as a fact — the same caution as the sector-shares table in worked example 8.

Total resources transferred to the States and Union Territories with legislature in BE 2026-27, including devolution of the State's share, grants and loans and releases under Centrally Sponsored Schemes, are ₹25,43,769 crore, an increase of ₹3,78,263 crore over the actuals of FY 2024-25.

Set that against total Union expenditure of ₹53,47,315 crore and roughly half of what the Union spends passes through to the States in one form or another. That single ratio is the bridge to the Finance Commission chapter, and the reason Article 280 matters as much as it does.

Government debt is the stock of outstanding IOUs issued by the government at any time in the past and not yet repaid; governments issue debt whenever they borrow from the public, and the magnitude of the outstanding debt equals the cumulative amount of net borrowing that the government has done. The deficit is the addition in the current period to the outstanding debt; the deficit is negative whenever the value of outstanding debt falls, and a negative deficit is called a surplus.

Deficit is a flow; debt is a stock. Every year's fiscal deficit adds to the stock, and every year's interest bill is charged on the stock. That is the loop the primary deficit is designed to expose, and reading (b) above is what the loop looks like when it has been running for decades.

Two costs of excessive deficits, both about interest rates. The first occurs even when there is no default risk, and has simply to do with the increase in the quantity of Treasury bonds offered in the market — more paper offered, at a higher yield to place it. The second comes from default risk, and it can compound: the more the markets fear a default, the higher the interest rate premium they ask, and the premium makes the solvency of the government in question even more problematic.

That spiral is the reason deficits are constrained by law and not only by prudence.

And growth will not necessarily rescue it. While robust growth in the quarter century after the Second World War allowed a fairly rapid reduction of debt-to-GDP ratios, this is not likely to happen now, and the ageing of populations is set to significantly add to current fiscal problems. Connect that to Module 2: the demographic dividend has a fiscal dimension, and an ageing population is a claim on future budgets.

One further connection, which turns this from a fiscal example into a macroeconomic one. Money supply is derived on a balance sheet approach, and on the sources side the first item is net bank credit to the government. When the Reserve Bank finances a deficit, or banks buy government securities, money supply rises by that amount unless something else offsets it.

So how the Government borrows, from whom, and how much, is one of the three sources of the money supply — which is why deficit financing, inflation and monetary policy cannot be discussed apart from one another, and why the deficits above belong in a monetary answer as well as a fiscal one.

Article 266(1) provides that all revenues received by the Government of India, all loans raised by that Government by the issue of treasury bills, loans or ways and means advances, and all moneys received by that Government in repayment of loans, form one Consolidated Fund. Money in it can be spent only on the authority of Parliament. Certain items are charged on the Consolidated Fund and shown distinctly — the emoluments of the President, the salaries and allowances of the presiding officers of the Houses — and charged expenditure is not voted, precisely because the independence of those offices should not depend on an annual majority.

So the classification questions in this example are not merely accounting. They determine what Parliament is being asked to approve, and on what basis.

The document is Budget at a Glance 2026-27, and every figure must be quoted with its column — actuals FY 2024-25, RE 2025-26 or BE 2026-27.

1. FISCAL DEFICIT = total expenditure − total receipts excluding debt capital receipts = the borrowing requirement. BE 2026-27: ₹16,95,768 crore, 4.3 per cent of GDP.
2. REVENUE DEFICIT = revenue expenditure − revenue receipts = borrowing for running costs. ₹5,92,344 crore, 1.5 per cent.
3. EFFECTIVE REVENUE DEFICIT = RD − grants-in-aid for creation of capital assets = 5,92,344 − 4,92,702 = ₹99,642 crore, 0.3 per cent. EFF-CAPEX = capital expenditure + those grants = ₹17,14,523 crore.
4. PRIMARY DEFICIT = FD − interest = 16,95,768 − 14,03,972 = ₹2,91,796 crore, 0.7 per cent — so about five-sixths of the borrowing is inherited interest.
5. Interest (₹14.04 lakh crore) exceeds the whole capital account (₹12.22 lakh crore). Transfers to States and UTs: ₹25,43,769 crore, roughly half of total expenditure. Deficit is a flow, debt a stock.