Effective Revenue Deficit

Effective Revenue Deficit is the difference between revenue deficit and grants for the creation of capital assets. In other words, the Effective Revenue Deficit excludes those revenue expenditures which were done in the form of grants for the creation of capital assets. Effective Revenue Deficit was introduced in the Budget of 2011-12 for the first time. In 2012-13, Effective Revenue Deficit was introduced as a fiscal parameter.

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