0:05 Hello, good evening and welcome to ANA Academy, a one-stop destination for all the English medium civil services aspirants. Welcome to the initiative of fundamentals of Indian economy. Today is the fourth session and in today's session I'll be discussing the important concepts associated with the idea of a fiscal policy. Now before I start the discussion, if you're liking this initiative, do not forget to hit the like button and if you're yet to join our YouTube channel, kindly do it right now. Those who want to download the PPT, please do join the telegram channel after the session is over, I'll be uploading the PPT as well as the handout of the concepts that I'm discussing in the session. So for downloading, this is
0:50 the source for you. Now a lot of you are writing the civil services for 2026 and 2027 and regarding your preparation, regarding the strategy, regarding motivation, you require certain assistance. All of this you can get at UNACadem UPC summit. Use the link provided in the description below to register. Now let me start. Yesterday if you remember yesterday we had a discussion regarding monetary policy. Correct? Yesterday we discussed monetary policy right what is essentially a monetary policy it refers to set of tools used by Reserve Bank of India to change the money supply to change the money supply now today we will be discussing the concept of fiscal policy
1:36 right the idea of a fiscal policy I'm using using the term fiscal policy instead of fiscal policy they will also use the term public finance so before I start the discussion get on with the first point do let me know am I audible and visible for all of you in the chat section please do let me know give me the confirmation that I'm audible and visible so that I can start with the first point now I'm audible and visible great thanks a lot let's start so fiscal policy refers to what fiscal policy simply refers to the policies of the government of India in the context of incurring expenditure as well as collecting revenues, right? Collecting income or receipts. They will
2:24 use the term receipts. Somebody will use the term revenue. Somebody will use the term income, right? Or money for that matter. Please don't get confused regarding that. How do we spend money? How do we earn money? All the policies are put together under heading called as fiscal policy or public financing. Now in the context of the fiscal policy the most important concept for you will be the concept of budgeting will be the concept of budgeting. I'll come to budgeting in a minute. Please don't worry. But please understand in addition to budgeting, you are also supposed to know the concept of taxation, right? The concept of taxation. And in addition to all of this, you also need to know how the government of India will
3:10 borrow from the market. How the government of India will borrow. Right? I'm talking about specifically borrowing. Again, we will cover that under the context of the budgeting itself. So, we'll go one by one. Listen to the discussion. Listen to the lecture carefully. Now the concept of union budgeting is simple, right? Once every financial year. Once every financial year, the union government on the first working day of February, remember this first working day of February. Earlier this was done on the last working day of February. But post 2017 this has been made at as the first working day of February. So the union government on the first working day of February will
3:56 announce set of documents which are generally referred to as budget documents. Right? So remember this budget is a set of documents. Budget refers to a process during which the government introduces set of documents gets them passed in the parliament. Right? These some of these documents will go to the president of India. the president of India will give the ascent that is the signature and after that the government will be allowed to withdraw the money spend the money etc. Now we why all of this is done? What is the logic behind it? Logic is very simple. There is a fund called as consolidated fund of India. Consolidated fund of India.
4:41 What is the importance of consolidated fund of India? The government of India if they want to withdraw even a single rupee from the consolidated fund of India, they require the prior approval of the parliament. Is the point clear to everyone? I'll repeat it. Listen to me very carefully. Right? What is the reason? Why does government do all of this from the consolidated fund of India? The government of India will be allowed to take money, spend money. But even before they are allowed to withdraw one rupee from the consolidated fund of India, they require the prior approval of the parliament. And that is a precise reason in the budget. Please remember the two most important documents. There are
5:26 multiple documents. The two most important documents are one which will provide the information regarding how much expenditure will be incurred by the government which is referred to as appropriation bill. And the second document is how much money will be collected by the government in different ways from different sources. How much money will be collected? How much revenue or the income will be generated by the government in that specific financial year and that is called as a finance bill. Is everybody okay with the statement here? Please do let me know. One is a financial bill and the second one is the appropriation bill. One will give you information regarding how much will be the expenditure incurred and second one
6:13 will give you information regarding from different sources how much money will be collected how much income will be generated by the government. Now in the context of budget please remember instead of using the term income or revenue for that matter you need to remember a technical term receipts right please remember this I'll not keep on using the term income I'll not be using the term revenue henceforth I will simply use the term receipts receipts simply represent how much money is collected by the government in different ways from different sources why you will understand in some time. Okay, come to the next point. So on the first working day of February, the finance minister will lay down these documents, present
7:01 these documents on the floor of the parliament. These documents are discussed, passed, then sent to president of India. The president of India once the president gives the ascent, let's say on the appropriation bill, now the government will be allowed to withdraw the money and spend the money. And this is essentially the intro, right? basics of the concept of budget but let me know in the chat section all of you will be able to answer the first part of the question that is if I ask you which ministry is responsible for preparation of the budget I know all of you will give me the correct answer but instead of asking you the ministry what if I say tell me the answer which department is responsible for preparation of the
7:46 budget do let me know those of those of you who do not who know the answer do let me know which is that department which is responsible for the preparation of the budget because I know all of you basically close your eyes and say sir it is the finance ministry absolutely correct it is the finance ministry which is responsible for preparation of the budget but within the finance ministry there are multiple departments there are multiple departments how many departments are there totally six departments remember under the minister of finance totally six departments and if you're wondering sir should we remember the number is it relevant for UPSC examination the answer
8:32 to both of your questions is yes and for both of the questions answer is yes reason being earlier one of these particular departments was part of ministry of heavy industries that is a department of public enterprises right it was part of ministry of heavy industries is it was a shifted from that to the minister of finance. Now the government of India is simply saying there is a department of public assets and management famously referred to as a deep there is a department of public enterprises again both are doing the same work all of able to understand one is named as department of investment and public asset management deep and the other one is department of public
9:17 enterprises both are doing similar work. So what is the point of having two departments which are doing the similar work let's merge both of them and if this is done suddenly the number of departments under the minister of finance will change that's the reason I'm saying please remember all of it so six departments under the six departments or out of these six departments the most important one for you in this context will be department of economic affairs remember the name department of economic affairs PEA is the department which is responsible for preparation of the budget. Most of you answered correctly. Under the department of economic affairs, there is a division called as budget division.
10:04 There is a division called as budget division. It is this budget division which is responsible actually for the preparation of the union budget. Done. Everybody's okay with the important points so far. Please do let me know in the chat section. Everybody is okay with the important points. Now whenever you talk about budget, listen to me carefully. Henceforth lot of concepts will be thrown at you. The budget essentially is divided into two parts. The budget is divided into two parts. one is called as the revenue side of the budget or revenue account and the second one is called as capital account
10:50 right and I'm pretty sure all of you have seen the question papers of 2025 prelims questions have been picked up from this particular chart as well as the deficits that is what we are going to discuss now and those who are preparing 26 27 or even other uh let's say the other competitive exams at the state level. Please memorize this particular chart. Okay. So revenue and capital the revenue side of the budget what is the meaning of it? Capital budget what is the meaning of it? Please remember this carefully. Under the revenue we are going to list out the kind of expenditures that are going to be incurred by the government as well as the receipts which are collected by the government. But the important point is
11:37 in the revenue side there is absolutely no change in the assets or liabilities of the government. You'll understand what is the meaning of it. Just give me some time. Whatever transaction is listed under or whatever transaction will fall under the revenue side either revenue expenditure or revenue receipt there is absolutely no change in the assets or the liabilities of the government of India absolutely no change and whatever transactions are listed under the capital side again the same concept capital expenditure capital receipts Be it capital expenditure or capital receipts there will be change in the
12:24 assets or liabilities of the government of India. I will prove this. I will make you understand. I will make you remember with a very simple example but don't worry as of now I will tell you the examples. I will tell you a trick to remember it as well. But as of now what is the basic idea? The budget will have two types of accounts. One is called as a revenue account and the second one is called as a capital account. How do I differentiate between a transaction of revenue as well as a capital account. In the revenue account, various expenditures, various incomes which are collected by the government are listed. But these do not change these do not change any of the assets of government of India or do they create any kind of
13:10 liabilities for the government of India. But on the other side the capital expenditure or capital receipts any transaction will change the assets or liabilities of the government. Let me start with the capital side then we will shift to the revenue side because it will be easier for you to understand. Let me start with a very simple example here. Investment in infrastructure. Investment in infrastructure. What is the meaning of it? Let's say government of India will spend 100 cr rupees and right let's say a highway is constructed a highway is constructed very simple question to all of you very simple
13:56 question to all of you you tell me highways can I simply say it is an asset I want an answer from all of you by the way highways can I simply say it is a type of asset and if government of India will spend 100 cr and a highway will be created. Can I now say the assets held by government of India the assets held by government of India the number of assets is increased. Everybody is okay with this? The number of assets is increasing. So always remember under the capital expenditure the assets are increasing. Will there be any impact on the liabilities because the assets are
14:42 liabilities both are there. Will there be any change in the liabilities? Yes, I will give you an example. Right? In case of right, let's say capital expenditure, right? Capital expenditure. Let's say government of India will issue certain loans to states will issue certain loans to states and right let's say certain loans which were taken in the past are repaid certain loans which are taken in the past are repaid. So loans given to the states let's say this year loans right which were taken let's say 2 years ago 3 years ago or 4 years ago have been repaid. Now all of you are okay if I say
15:28 if the center will give a new loan to a state loan is an asset for the central government. Done. In this case when the center will give a loan to a state loan is asset for the state asset for the central government. So asset is increasing. If the loan was taken by the central government let's say back in 2015 and now the loan will be repaid. Can I simply say the liability of government of India has gone down. So in this case that is under the capital expenditure assets will go up liabilities will go down. Is everybody okay with the arrow mark here? Please do let me know. Is everyone okay with arrow mark? Please remember this arrow mark. And you don't have to
16:14 remember all the examples that I've given. Simple capital expenditure. Remember road. If you invest in road asset will go up. If the assets will go up, liabilities will go down. Very simple. Liabilities. Come to the other side. Capital receipts. Capital receipts. Receipt means what? Income. I said, how does the government earn income? Simple. Imagine government of India will sell a company that was owned by government of India. certain percentage of ownership in the company will be sold by government of India. I'll give you current affairs examples. Air India, all of you heard of the name of the company Air India. Although in in
17:02 in a bad situation in recent times, don't worry about it. But Air India earlier until recently was owned by government of India. Government of India sold Air India to a private sector company. So now tell me right all of you okay? By selling the company government is earning money. Is everybody able to understand my statement here? Government is selling the asset and earning money. I'll give you one more example. All of you heard of the company LIC life insurance corporation. Until very recently 100% of the LIC complete ownership of LIC was with government of India. Today if you check the ownership
17:49 LIC's ownership with the government of India is around 95%. I'm rounding off the number around 95%. Which means 5% ownership has been sold to somebody else in the market. So essentially what has the government of India done? It has sold a certain ownership in the asset and received the income received the receipts. So now please do let me know can I simply say under the receipt assets which are held by government of India will go down. Correct? Incorrect do let me know. Under the right receipts one type of change will be assets which are held by government of India will go down. Why? assets will be sold so that the
18:36 government will collect the money. Right? So the companies will be sold and the technical term for this is a disinvestment. Remember this disinvestment disinvestment technical term is disinvestment and do not memorize the full term disinvestment. Simple argument investment means what? You tell me when you invest can I simply say in a company your ownership will increase correct when you say when you basically invest money in a company your ownership will increase can I simply say opposite of investment with disinvestment right do let me know because I've seen most of the students do not understand
19:22 the meaning of the term disinvestment and simply memorize everything do not Have the habit of memorizing everything in economics not required. You know the meaning of investment. Your ownership will increase. Opposite of investment is what? Disinvestment. Right? That is essentially you your ownership is going down. The amount of assets you're holding is going down for what purpose? You need money. You're selling ownership because you need money for expenditure purposes. Everybody is okay. Right? So disinvestment any other any other type of a reade for example let's say government of India will borrow from the market let me know government of India will
20:07 borrow from the market how does government borrow from the market simple listen to me carefully now the government of India is allowed to borrow either from the domestic market domestic market means within India or is allowed to borrow from external market is either allowed to borrow from the domestic market or external market. And whenever you borrow from the domestic market, this is called as internal debt. Internal debt. It will lead to internal debt. And when government of India will borrow from the external market, it is referred to as external debt. internal debt and external debt. But
20:55 please remember this most of the debt I repeat most of the debt that is held by government of India it is essentially internal debt how much around 95% of the debt is held by government of India which is internal debt in nature that is government of India has borrowed from the domestic market and will repay in the domestic market itself what about external debt the government of India has around 4 and a half% to 5% in the form of external debt which is majorly from the international agencies. the borrowing that the government of India has done from international agencies for example Asian Development Bank for example World Bank for example
21:44 BRICS bank etc etc but most of the debt of government of India is internal in nature please remember this and if you're wondering sir why why has the government of India right has or why does it have majorly the internal debt reason is very simple whenever you borrow from the external market you need to make a payment in let's say external currencies that is foreign currencies let's say dollars right I hope you understand dollar and I'm pretty sure all of you are reading the newspaper or at least you're hearing or at least attending economic current affair session very often you'll come across the statement saying that Indian rupee has been losing value against the dollar
22:29 Indian rupee has been losing value against the dollar. Which means imagine 2 years ago $1 was is equal to 65 rupees. Today $1 has become is equal to around 86 rupees. 86 87 88 also. Which means if you borrowed $1 3 years ago, you want to repay the same dollar today, you'll have to spend 86 rupees to get that particular dollar. Everybody's able to understand the argument here, right? So there are various issues external borrowings will always lead to right pressures will lead to financial problems for the government in case of rupee depreciation that is the reason government of India historically if you see most of the debt has been held in
23:17 the internal market itself everybody is okay right so far so good right so this investment the assets held by government of India will go down what about borrowings now tell If government of India will borrow money, can I simply say liabilities of the government will go up? Liabilities of the government of India will go upwards. Now right everybody is okay. I'll put everything that I' have discussed so far in a nutshell. I'm talking about capital side of the budget. Capital account. In the capital account, we have discussed a capital receipts, capital expenditure. What happens in capital expenditure? The
24:03 assets held by government of India go up. Liabilities go down and whatever you have written under the capital expenditure side, write exactly opposite on the receipt side. Write exactly opposite on the receipt side. What do you mean by exactly opposite? Assets under the receipt will go down. Liabilities under the capital receipts will in every everybody memorize this particular table. Please do let me know now. Can everybody memorize this particular table? Vai my dear you are talking about swift platform. Swift is not a problem for India. I hope you understand right. Uh no making payments using the swift is
24:49 not a problem for India. India is participating. India is allowed to use the swift. Not a problem for India. For Russia, it is a problem. For Iran, it is a problem, right? For India, it is not a problem. You can easily use the swift to make payments. Done. Everybody's okay. So, this is essentially the capital side of the budget. Please memorize this particular table. 2025 prelims. There was a question on this deficits. There were question. We will solve them one by one. Before I go forward right or uh let me finish one more concept then we can take up one MCQ now now there is right other side of the budget now another side of the budget that is the revenue account or revenue budget. What is this concept of a revenue budget? I told you
25:35 initially the definition is very simple. The revenue side of the budget will have all the transactions which will involve expenditure of the government or receipts of the government which are done on day-to-day basis which are done on general basis and these do not create any assets do not create any liabilities for government of government of India any transaction under the revenue side no change in the assets no change in the liability example Let's start revenue receipts. All of you heard of taxes. All of you heard of taxes. There is a very famous statement. Death only comes once. Whereas taxes
26:22 come every year. Again of course they were talking about income taxes. Don't simply say sorry you are wrong. Taxes do not come only once in a right. Let's say once in a year they come everyday basis. GST you will say. Look at GST. I keep on paying GST every day. So you're wrong my dear. This statement was given the context of income taxes. Income taxes are generally paid once a year. Right? So I hope you understand the taxes which are collected by the government of India. Be it GST, be it income taxes, be it corporate taxes, be it import taxes etc. Everybody is okay if I say these are part of the incomes earned by government of India. the receipts generated by government of India. But do
27:09 you tell me now if you have paid income taxes to government of India, do you think government of India will repay it back to you? Does government of India come under a liability because the government is collecting income taxes from you? Do let me know. I want answer from everyone. By the way, if you have paid GST, if you have paid income taxes to government, is the government of India liable to repay it back, is it under right, let's say liability, any kind of liability that in the future they will give it back to you? Hirag says yes, how come my dear tell me my dear? Right? Where has it been told to you that government is going to repay these income taxes to you? Please do let me know also if there is someone in the
27:56 income tax department tell me also right give me their phone number I will forward it to finance minister right so no government is not coming under any kind of liability please remember there is absolutely no liability on the government of India should the government of India provide a certain facilities to you yes government will provide facilities but please understand Whatever facilities the government provides is not just only for you. All of you able to understand government will collect the taxes use it to construct highway. Do you think that highway will be constructed only for you? Can you simply say I've paid income taxes so only I will use the road. Then
28:42 your neighbor will also say I also have paid income taxes. Your your friend another friend will simply say I also have paid GST. I hope you understand right it is the duty of every individual to pay the correct amount of taxes to government. So these taxes are not counted as a part of liability for the government because it is a duty to pay taxes and it is entirely the prerogative of government of India how they want to use there they want to use the amount of taxes collected in terms of expenditure in terms of expenditure done everybody's okay right so receipt best example of receipts is taxes any other example non-
29:28 taxes Now what do you mean by non- taxes? Let's say you'll apply for a driving license. You'll apply for a passport. Will you not pay certain charges to government of India? Think of this and do let me know. You'll apply for driving license. You not pay certain charges to get that? Yes. You'll apply for passport. Will you not pay certain fees to the government? Yes. So government will impose various fees, various charges, various fines etc. But these are part of non- tax incomes. Non- tax incomes done right. So charges, fines, fees etc. I'll give you one more
30:14 example. Right? Let's say the uh the government of India will collect a dividend. The government of India will collect huge amount of dividend. What is the meaning of dividend? Let me explain this. What is the meaning of a dividend? Dividend essentially means the amount of returns which are paid to the shareholders. I'm using the term shareholders. Some of the books will use the term owners. Please do not get confused. Certain amount of money that is paid to the shareholders or income the uh owners of the company. Let's say I will invest in certain companies shares a Reliance company. If the company generates
30:59 profits, part of the profit will be paid to the shareholder and that profit is called as dividend. Is everybody okay with my statement? I'll repeat it again. Whenever the company generates profits, important term is profits because the profit has to be generated in order to pay dividend to the shareholders. Because by virtue of owning shares, you are the owners. You're the owners of the company. Owners will get only the the returns only when the company earns profit. If the company doesn't earn profit, you are not going to get any kind of returns. So part of the profit will be taken distributed amongst the owners or shareholder that is called as
31:45 dividend. So government of India will have ownership in multiple companies. Correct. Government of India will own multiple companies have ownership in multiple companies. So part of the profits will be taken by the companies and given to government of India dividend. So the government will be earning revenue, earning receipts in taxes as well as non- taxes. What about expenditure? But before I shift it to expenditure, please look at all the types of all the examples of receipts here and do let me know are these any of the receipts generating a liability for government of India. Are any of these receipts changing the assets of government of it?
32:32 Everybody's able to understand. Please look at these receipts that is under the revenue side. Are these receipts changing any of the assets or the liabilities of government of India? Absolutely no. They do not change any kind of receip I'm sorry assets or liabilities of government of come to the expenditure side. Come to the expenditure side. Revenue expenditure. I'll keep on giving you certain examples. Listen to me carefully. The government of India will provide certain social welfare expenditures certain schemes where social welfare expenditure is incurred by the government. So example the government of India will provide subsidies for pregnant women.
33:20 The government of India will provide certain schemes under which pension is paid for old women. to tell me when government will incur this expenditure does the government get anything in return. Think of it. Government is right basically paying subsidies. Certain welfare schemes are launched. The government will pay 500 rupees per month or 6,000 rupees per month etc. Will the government get anything in return? Is the government's assets going to change? Is the government's liability going to change? Absolutely no. Neither the asset change nor the liability change but the government is incurring expenditures.
34:05 There is a change in the amount of expenditure incurred by the government. Social welfare expenditures subsidies. Another example right another example for right this case I'll write two more terms here. Listen to me very carefully. Interest payment interest payment right under expenditure I'll say interest payment under receipts I will write one more term interest received interest paid interest received some of you will be thinking sir what is this interest why are you writing this under the expenditure also under the receipt also
34:51 imagine government of India has given a loan to state government. The state government will pay interest on the loan. That interest earning will be counted as a part of revenue receipts. Is everybody able to understand this? I'll repeat it again. If there is any doubt, let me know right now. The government of India has given a loan to the state government. The state government will pay interest on the loan that will be counted as a part of re revenue receipt. Everybody's okay. And on the other hand, let's say central government has taken a loan. It has borrowed. When the government has borrowed, it has to pay interest. That interest paid by the
35:39 central government will be counted as part of revenue expenditure. It is accounted as a part of revenue expenditure. Everybody is okay. Revenue receives revenue expenditure. And I know some of you basically say sir but the government is paying interest, right? Interest is associated with the loans, right? Then it should be counted as a part of capital account. Some of you will have this kind of a doubt later, right? You'll basically say it is interest. interest is associated with the loan. It should be counted as a part of capital. My dear all of you please listen to me. When the central government will give a loan of let's say 100 rupee, this is the principal amount.
36:26 It will collect the full principle after the tenure of the loan is over. But till then it will keep on collecting interest payment. Is everybody able to understand this? Right? Everybody is able to understand on the same right or uh associated with the same now imagine if the government of India has borrowed 500 rupees it will pay interest let's say for 4 years after the end of four years it will repay the full amount of 500 rupees and that is the reason interest paid by the government is counted as a part of revenue expenditure interest collected by the government,
37:11 interest earned by the government will be counted as revenue receipts. Right? So everybody's okay. Interest paid, interest received. And other types of expenditure, for example, let's say government of India, government of India will pay salaries, right? To the government employees, right? It will pay for various other types of maintenance of right certain, right? Let's say assets. There is one more term called as GCCA. Please remember this. There is one more term called as a GCCA. All of you those who have doubt listen to me first. I will address your doubt at the end of the session. What is GCCA? Grant for creation of capital asset. Please listen to me very carefully right
37:57 now because I know lot of you will have doubt regarding this later. Listen to me right now only. What is GCCA? Grant for creation of capital asset. Why there is a doubt? If you look at the name, the name has a term grant for creation of capital asset. The name has the term capital and with this money we are going to create infrastructure asset creation. A lot of you will have this kind of doubt that in that case don't you think this should be part of capital expenditure side. A lot of you will have this kind of doubt. It should be part of capital expenditure. You will say but
38:44 historically government of India has not kept this under the capital expenditure. Has kept it under the revenue expenditure. Why? Listen to me carefully now. If the central government will spend 100 cr rupes develop infrastructure can I simply say the government of India's assets have increased here do let me know I'll repeat the statement if the central government will spend 100 cr develop an infrastructure construct an infrastructure can I make a conclusion government of India's assets have increased Right? This will be counted as a part of
39:29 capital expenditure side. It will be counted as a part of capital expenditure. But let me give you second example. Now here is the government of India. The government of India will give 100 cr to the state government. Let's say it will give the 100 cr rupees to state government. State government will use the 100 cr rupees develop infrastructure develop an asset. Now you tell me in the second example I'm talking about this one which is falling under the right let's say roughly drawn rectangle is the central government's asset changing or the state government's asset changing
40:15 do let me know in this example is the central's asset changing or the state's asset changing all of you agree central government asset is not changing here it is the asset which is owned by the state government which is actually changing. My dear this is an example of grant for creation of capital asset. Grant for creation of capital asset GCCA wherein expenditure is incurred for creation of infrastructure for creation of an asset but that asset is not owned directly by government of India. The government of India's asset doesn't change and moreover please understand
41:00 here the term used is grant. Grant means what? One side transfer. This amount will not be repaid by the state government in this example. It will be simply paid by the center to the state for development of infrastructure. So the state's asset will change. Some other authorities assets will change not of central government. That is the precise reason. This is counted historically as a part of revenue expenditure not as a part of capital expenditure but as a part of revenue expenditure. Is everybody okay? Now do let me know everybody is okay with whatever components I've written. How do you differentiate between the revenue side?
41:46 What is the difference between the capital side? within the capital side. How do you understand what is capital expenditure and capital receipts? This is a very important distinction, very important chart. Please memorize this. Please memorize. And more importantly, don't simply memorize. Understand the concept behind all of it. If you know the concept, trust me, any kind of question asked by the UPSA, be it prelims or mains, you'll be able to write the answer. Is it okay? Done sir. Then central where invested its asset my dear when did you join? Did you remember the first thing that I started discussing was this only where is that example
42:32 right I've discussed all of it that is the central government investing in roads is that slide I'm not able to get the slide don't worry central government investing in roads I've told you this right it is counted as a part of expenditure is counted as a part of expenditure that was the first part that I discussed right so please be very careful listen to me very carefully if you miss something you will get confused that's the reason attention attention is required let's start now first question practice question consider the following statements first statement the government needs parliamentary approval to conduct transactions in the consolidated fund and public account consolidated fund yes the government
43:19 requires government requires that permission what about public account. Government doesn't require any kind of permission. Remember this, government doesn't require any kind of permission to conduct transactions under the public account because it is done through executive authority. The budget is prepared by the budget department. Is the budget prepared by the budget department? No. Department of economic affairs. There is no budget department. There is a budget division which is part of the department of economic. Incorrect. The government had to amend the constitution to prepawn the budget presentation. I told you earlier the government used
44:04 to present the budget on the last working day. LW LWD is last working day. But now post 2017 the government is presenting this on the first working day. Did the government of India had to amend the constitution for this? Answer is no. Absolutely no. Why? Please remember this. In the constitution of India, the article which talks about the budget doesn't mention the word budget. There is an article, right? There are multiple articles. Don't worry about it as of now. But the constitution of India doesn't mention the word budget. Rather it mentions something else which is called as annual financial statement
44:50 and the constitution doesn't mention when the budget has to be presented. There is absolutely no con constitutional provision regarding the presentation and that is the reason the government of India earlier used to present the budget on the last working day. Now it has prepawned to the first working day through executive authority. Absolutely no requirement of constitutional amendment. The budget from 2017 has been presented by the union government on the first working day of February. Yes, this statement is absolutely true. Right option for the question will be option A only four right that is the fourth statement is the correct one okay now let's go forward right we will take up couple of more questions don't worry
45:36 then I'll give you questions from the previous papers as well now based on this information associated with the revenue side of the budget capital side of the budget listen to me carefully there are different types of deficits that you need to understand remember there are different types of deficits. What are the different types of deficits? One is the revenue deficit. First one is rather than writing here, I'll write it here. Okay. First one is revenue deficit. I will start using the short form revenue deficit. Right? That is RD. Second one is effective revenue deficit.
46:22 Right? Third one is the fiscal deficit. Third one is fiscal deficit. In short this is called as FD. This is ERD. And the fourth one is the primary deficit. Fourth one is the primary deficit PD. Primary deficit PD. Now let's go one by one. What do you mean by revenue deficit? Revenue deficit simply means in the revenue side of the budget. Under the revenue account, all of you remember what are there under the revenue account. Under the revenue account, we have the revenue expenditure and revenue receipts. I'm using the
47:09 short form. I'll repeat it again. Revenue expenditure. R E revenue expenditure. R are revenue receipts. So under the revenue side of the budget there is revenue expenditure there is revenue receipt. How much is the excess of expenditure compared to receipt? How much more money are we spending under the revenue expenditure compared to the money that the government is earning under the revenue receipt. The difference between that is called as revenue deficit. Is everybody okay with the idea here? Everybody's okay. Now please understand the government of India wants to reduce the revenue deficit to 0%.
47:56 0% of what? Why these are given in percentages. These numbers are calculated by the government in terms of absolute rupees that is how many rupees is extra they will count it. But whenever you want to read it, easy way to understand it is look at what is this out of GDP number that is as a percentage of GDP as a percentage of GDP. So generally understand this the government presents all of them as a percentage of GDP. The government of India wants to reduce the revenue deficit to 0%age of GDP. Meaning what? Under the revenue head, the government wants to spend the same amount of money as it is earning under the head. Simple.
48:45 How much we are earning under the revenue head? Expenditure should be equal to that. Right now, what is the situation? Expenditure is more compared to how much we are earning. That is essentially the revenue deficit. And if you're wondering why why does the government of India want to reduce this revenue deficit to 0%age of GDP? The answer is very simple. You tell me does the government the assets held by government does the assets of the government change under the revenue side of the budget or capital side of the budget? Do let me know when when the governments will spend money will its assets change under the revenue head or
49:32 capital head? Expenditure is incurred under both the sides. But the assets of the government or the liabilities of the government will only change when you are spending under the capital side of the budget not under the revenue side of the budget. That is the reason listen to me carefully under the revenue head if you are earning 100 and if you're spending 150 rupees there is a shortage of 50 rupees correct there is a deficit of 50 rupees how do you take care of the deficit you will borrow you will essentially borrow from the market now there is a golden rule there is a golden rule what does the golden rule simply say when you borrow Borrow
50:17 from the market, borrow it for creation of assets. Do not borrow it for consumption purposes. Borrow it for asset creation. Now, if the government will borrow 50 rupees to take care of the deficit in the revenue side, is the government creating assets under the revenue? No. It is simply expenditure. There is no asset creation under the revenue side. Asset creation happens on the capital side. That is the simple reason why government of India wants to reduce the revenue deficit to 0%age of GDP. Everybody is okay with the argument here? Please do let me know. Everybody's okay with the argument. Now, effective revenue deficit. What is ED? Effective
51:04 revenue deficit. What is the effective revenue deficit? If you have followed the discussion that I've had in the last 15 minutes, I told you there is a component called as grant for creation of capital assets. GCCA grant for creation of capital asset. The grant for creation of capital asset is counted as a part of revenue expenditure. Correct? It is counted as a part of revenue expenditure. You tell me now please participate. Please participate. I'm I'm able to see that the participation in the chat section has gone down now drastically gone down. Why sir I'm sleeping. You continue. I'm sleeping. Okay. So
51:49 participate. Now you tell me under the grant for creation of asset will there be creation of asset? Very simple. Will there be creation of asset? Not owned by the center but will there be a creation of asset? Of course. Yes. Of course. Yes. Are somebody saying no? Listen to my statements. Listen to my statements carefully. Under the grant for creation of capital asset, central government's assets will not change but the asset will change for somebody for the state government the asset will change. So the argument of certain experts in fact there was a committee also rangarajan committee which recommended that because the grant for creation of capital asset is somehow
52:35 associated with change in the asset may not be of central government but in the whole economy asset will change. That is a precise reason this committee recommended that the GCCA should not be counted as a part of the revenue deficit or should not be counted technically as a part of revenue expenditure and that's the reason have a look at this effective revenue deficit the formula is very simple revenue expenditure but under the revenue expenditure there is a component called as grant for creation of capital asset that will change certain assets may not be of the central government but in the economy assets will change. So what will I do? I will write minus grant for creation of
53:24 capital asset and from this I will subtract revenue. This is called as effective revenue deficit. Can I rewrite the formula? Do let me know. Can I rewrite the formula and tell me will there be any change in the formula if I rewrite it? So what is the meaning of rewriting? I will rewrite the formula this way. Have a look at the extreme right side. Now revenue expenditure minus revenue receipts minus grant for creation of capital asset. There is absolutely no change in the outcome. I'm rearranging. And when the signs are plus minus you can easily rearrange outcome will not change. So revenue expenditure minus
54:11 revenue asset will give me revenue deficit and I will write GCC as it is grant for creation of capital asset. This is essentially the formula that will be given in the books. Do not be confused. They will start from revenue expenditure subtract GCCA subtract revenue asset rearrange the formula write it as revenue deficit minus GCCA there is absolutely no change in the outcome only change is I'm taking out grant for creation of capital asset because no doubt central government's assets are not changing but it will lead to creation of asset hence you need to take it out out of grand out of the revenue
54:58 expending. This is called as effective revenue deficit. Effective revenue deficit. Now next fiscal deficit FD fiscal deficit. Fiscal deficit simply refers to market borrowings or rather than writing market borrowings simply write borrowings. How much money does the government of India borrow this year? I repeat, how much money does government of India borrow this year is called as fiscal deficit. Is everybody okay with my statement? I'll repeat it again. How much money does government of India borrow this year is called as fiscal deficit. Why
55:44 I'm stressing so much? There are two reasons. There are two reasons behind it. What is the first reason? Imagine government of India had borrowed 100 cr rupees in 2020. Will you count this as a fiscal deficit? Part of fiscal deficit in the financial year 26. Tell me now if government of India had borrowed money back in the year 2020 100 cr rupees. Will you count this as a part of government of India's fiscal deficit of this year? Will you count it as part of fiscal deficit of this year? No, to not count it. Why? Fiscal deficit simply means how much you borrow, government borrowers this year.
56:31 And I'll give you one more reason why I'm stressing so much on this. National Highways Authority of India, NHI, National Highways Authority of India. Imagine they have borrowed 100 cr rupees this year. You have borrowed 100 cr rupees this year. Who owns a national highways authority of India? The owner of NHI is the government of India. Simple. Now tell me, will you count this 100 cr as the fiscal deficit of government of India? Think of it. Will you count this 100 cr which has been borrowed by NHI as fiscal deficit of government of India? Answer should be no.
57:16 None of you have replied but I will only tell the answer. Answer should be no. Why? In this case, government of India has not borrowed it. Right? Government of India has not borrowed it. Somebody owned by government of India has borrowed it. Right? So, government of India's fiscal deficit will not be including this 100 cr. And that is the precise reason I'm stressing the statement again. How much is borrowed by government of India will be fiscal deficit. How much will the borrowing of government of India will be fiscal deficit if somebody else has borrowed? No, don't count it as fiscal deficit of government of my dear those who are listening it is as good as saying
58:04 your father is there. Again just a simple example your father is there in the home you're also there in the home. If I give a loan to you, can I simply say your father has borrowed money from me? Please do let me know. At least now you should be able to understand. I hope you understand. At least now if I give 100 rupee loan to you, will your father be borrowing from me? No, you have borrowed. Right? It is your borrowing, not your father's borrowing. Right? Apply the same logic. In this case the NHI has borrowed not the government of India. If government of India had said listen to me I I'll give you one more example here itself. If government of India says you borrow if government of India will tell
58:49 NHI you borrow even then government of India's fiscal deficit fiscal deficit will not change. Fiscal deficit simply means how much is the direct borrowing by government of India. Direct underline that particular term direct if somebody else has borrowed even though they are owned by government of India fiscal deficit of government of India doesn't change done everybody's okay right so next primary deficit primary deficit what is this concept of primary deficit primary deficit essentially is the fiscal deficit minus interest payment Again there are different varieties of it. Net
59:36 primary deficit, gross primary deficit etc. Simplify. Okay. So primary deficit is fiscal deficit minus interest payment. What is the meaning of it? All of you stop for a minute. Whatever you're doing, listen to me. Just give me one or two minutes because this is slightly technical. I know every book has given this formula. But what is the meaning of the formula? You need to understand the meaning of the formula. And if UPSC next year will ask you this question in the preliminary examination, between all of these deficits, which of the deficit will give you the most qualitative data? Underline the term qualitative. Out of all of these deficits, which of
1:00:22 the deficits will give you qualitative data? It will be primary deficit. Why? Please listen to me carefully. Imagine this year the government of India wants to spend 100 cr. Please listen to me carefully now. this year for launch of the schemes for right let's say salary payment for development of infrastructure etc the government of India wants to spend 100 cr rupes and the government will earn receipt of the government will earn receipt of let's say 100 cr rupes can I now simply say the finances of the government are
1:01:07 the most efficient in this case. Please do let me know now in the chat section. If the government of India wants to spend 100 cr on let's say right subsidies on infrastructure on payment of salaries etc. and the government earns 100 cr can I simply say the finances of the government are most efficient in this example most efficient. Why? Whatever you want to spend for this year, you are able to earn that much money. Correct? Whatever you want to spend, you are earning that much money. Your parents will keep on telling you this point. Earn sufficient to take care of your expenditures.
1:01:54 Correct? Earn sufficient amount of money which will take care of your expenditures at least. Is the government of India doing the same thing here? earning sufficient amount of money to take care of its current year expenditure. Listen to me very carefully. Now there is a payment done by the government which is called as interest payment. Interest payment. Now is it okay if I say this payment of interest let's say this year is a 10 CR but can I simply say that this payment is done because government has borrowed money in the past is my statement clear to all of you I'll repeat it again the government this year
1:02:41 will pay interest of let's say 10 cr because the government has borrowed money in the past let's say hypothe Hypothetically let's say 2020 the government of India borrowed 100 cr at a rate of interest of 10%. Which means annually government will have to pay interest of 10 CR. So this interest payment of 10 CR is because government has done something in the past. It is not associated with anything that the government is doing this year. It is associated with what government of India has done in the past. Everybody is okay. Please do let me know. So far so good because now it will be complicated for some of you. It will get
1:03:28 complicated. Now what is the complication? Let's say in this year let's say this year the government of India will borrow 10CR the fiscal deficit of government of India. What do you mean by fiscal deficit? How much money is the government borrowing? How much money is the government of India borrowing this year? Is called as fiscal deficit. Let's say the government of India will borrow 10 cr this year and all the 10 cr will be used to pay interest on the loan taken in 2020 by the government. So now tell me can I simply say in this example government of India has borrowed 10 cr but not even a
1:04:15 single rupee out of 10 cr is used by the government to take care of current year expenditure. All of this is being used to basically pay the interest which is an activity of past no relation to whatever government is doing this year. Everybody is able to understand this. Do let me know. Everybody is able to understand. What is the importance of it? Importance is if the government is borrowing 10 CR this year uses all of its money that is the 10 cr to pay for something done in the past. Can I simply conclude? Can I simply say that this year the government finances are good?
1:05:03 This year the finances of government of India are efficient, are good enough. Why? Government wants to pay for salaries. It has generated money. It has earned income. The government of India wants to construct road. It is not borrowing. It has money. It has generated income. Government of India wants to launch a scheme to pay let's say or provide subsidies. It has generated sufficient amount of income. it is able to take care of it. So this year whatever expenditures that the government of India wants to incur it is not borrowing even a single rupee for that. Whatever money they are borrowing it is to take care of
1:05:48 something that the government of India has done in the past. That is the concept of primary deficit. Let me show you the formula and explain using the formula. Have a look at the formula. Primary deficit is equal to FD minus interest payment. FD minus interest payment. What is the importance of this? Now tell me if I tell you this year the government of India is going to borrow 16 lakh cr rupes. I'll repeat the statement. The government of India will borrow 16 lakh cr rupees. That is fiscal deficit. Will that number tell you how much of the 16 lakh cr is for interest payment? How much of this 16 lakh cr is because
1:06:35 government is not able to generate revenues to take care of road construction to take care of subsidy payment to take care of right let's say other types of right salaries or wages etc. Will that 16 lakh cride you that quality information? Will that FD number provide you that kind of quality information? Absolute no. FD will simply tell you how much money is the government borrowing this year. But can I simply say PD will tell you the primary deficit will tell you how much of the borrowing is to take care of expenditures associated with past activity. how much of the borrowing
1:07:21 is to take care of current year expenditure that information primary deficit will give you and that's the reason I said out of all of these deficits out of all the four deficits that I've listed here which is the most qualitative qualitative right FD is mostly followed yes which is the most qualitative information is the primary deficit primary deficit will tell you whether the government finances are efficient, inefficient, whether government is able to take care of your current current year's expenditures or not. Everybody is okay. That's the reason I'm saying focus on the conceptual clarity. T is do not
1:08:06 run behind formulas. Lot of you will memorize the formula. I know that lot of you early morning you'll wake up you'll eat soaked badams first and then start open the book and start memorizing like this PD is equal to FD minus interest FD minus interest FD minus interest suddenly they will ask you what is the importance you will simply say not right you are not aware of okay solve an MCQ solve an MCQ consider the following transactions of the union government giving loans loans to states. The government receiving interest on the loans given the grants for creation of capital assets. Which of the above are part of revenue
1:08:53 expenditure? Which are part of revenue expenditure? Let's start. Government giving loans to states. Government will give a loan to a state. Can I simply say the assets of the government will increase and moreover loans taken or loans given it is part of the capital side. Simple it is part of the capital side. You can use elimination method but don't worry the government receiving interest on the loans given. Right? The government receiving interest on the loans given. Interest is part of revenue. Interest paid or interest received is part of revenue. But here the government is receiving receiving interest means what? This will become part of revenue
1:09:39 receipt. It will become part of revenue receipt not revenue expenditure. Grant for creation of capital asset. Straightforward it is a part of revenue expenditure. Third one is correct. Right option for the question will be option C only three. Please be very careful. Please be very careful regarding these kind of questions. Okay, one more practice question. Consider the following statements. The government of India is allowed to borrow only from the domestic market. Underline the term allowed to borrow only. Is it allowed to borrow only from the domestic market? No. Historically, government of India has kept internal debt more conscious decision. Not
1:10:26 because there is a condition on it, not because there is a compulsion on the government. First statement incorrect. All the receipts under the capital receipts are non-debt creating receipts. Some of you will say sir you have not explained the term non-debt creating. Please listen to me very carefully. Let me go back to capital receipts here. Where is capital receipts? Okay. Right. These are the types of receipts. I've given you one example that is a disinvestment. Another example is borrowing done by the government. Let's start. What is the meaning of debt creating and non-debt creating? Debt creating means it will create a liability. The term okay with all of you. Debt
1:11:11 creating means it is creating a liability. Non debt creating means no liability created. Absolutely no liability. Now you tell me are all the capital receipts non-debt creating receipts? No, some are non-debt creating, some are debt creating. Is it? Okay. Right. Some are debt creating, some are non-debt creating. Done. So, come back to the question here. All the receipts under the capital receipts are non-debt creating. Incorrect. Right option for the question will be option A. None of the above statements are true. Let me go forward. One more question. How many of the following are part of the capital receipts? How many are part of capital
1:11:58 receipts? Income taxes collected. Again I told you capital means what? Asset or liability. It is associated with change in the asset or liability. And specifically under the capital receipt what will happen? Right? I hope all of you remember this asset will go down liability increases. So income taxes collected income taxes do not create any liability for the government. No amount received upon selling companies owned by the government of India. Right at capital reite if the government of India will sell the company can I simply say assets will correct assets will go down right and that is part of capital receipt.
1:12:43 Borrowings are done by issuing the government bonds. Yes. Right. If the government of India will issue bonds and borrow it will create a liability. Liability increase under the capital receipt. Dividends transferred by the governmentowned entities. The dividends which are transferred are part of revenue receipts not capital receipts. Okay. So fourth one is incorrect. Second and third are correct. Right option for the question will be option B. Only two are correct. Everybody's okay. Please do let me know. Everybody's okay with the discussion. Now this is what I wanted to discuss with you people in today's session. That is the kind of borrowings are done by the government. Right? The
1:13:29 concept of deficits, the concept of revenue account, capital account etc. Whatever doubts you have, it is the right time to raise the doubts. I will address your doubts one by one. Start asking the questions if you have any. Huh? Please do let me know and I see many of you keep on joining in between. You'll join in between and start asking me sir right a right I don't understand what you're discussing my dear since Monday I've been telling you this the session will be live at 8 please do join at 8. It is like you joining after the intermission of a movie. If you come after the intermission of the movie, you will never know why both are fighting, right?
1:14:16 Why they are right far away from each other, why the hero is sitting in one corner and the villain is right standing there, etc., right? So, please do join at 8:00 p.m. Tomorrow there is a session, please do join at 8:00 p.m. Okay. Uh, which book to read for basic economy? My dear, you if you are a
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