Definition
Effective Revenue Deficit
The effective revenue deficit is the revenue deficit reduced by grants given to states and other bodies that are actually used to create capital assets.
The Centre transfers large grants-in-aid to states and agencies that are booked as revenue expenditure even though states use much of it to build assets. To avoid overstating consumption-type spending, the Budget reports an effective revenue deficit that subtracts these capital-creating grants from the headline revenue deficit.
The concept was introduced in the early 2010s to give a truer picture of the quality of public spending. A narrower effective revenue deficit suggests that, once asset-creating grants are accounted for, the government is borrowing less purely to fund running costs.
Related terms
- Revenue DeficitThe revenue deficit is the excess of the government's revenue expenditure over its revenue receipts, indicating that day-to-day running costs are being met partly through borrowing.
- Devolution to StatesDevolution is the constitutionally mandated transfer of a share of the Centre's divisible tax pool to the states, as recommended by the Finance Commission.
- Grants-in-AidGrants-in-aid are financial transfers from the Centre to states or local bodies, given over and above their share of central taxes, often for specific purposes or to bridge revenue gaps.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.