Debt & Deficit are same things?

No,
when youre 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 Rs. in military, poverty removal schemes,
floods, draughts, tsunami reliefs etc. so they're bound to run in deficit. And
ultimately have to borrow from someone to fill that gap.
Is Deficit bad?
that depends on whether youre borrowing for Development work or not?.
there are 2 types of Govt. Expenditure (spending)
Revenue Expenditure
= when Govt. spends money paying salaries to its employees.
or buys some machine guns or missiles.
such Expenditure is non-productive (Of course these things are essential to
run the nation, but its 'non-productive' in this classification)
this spending Doesnt create assets* but money wasted in
o Salary & perks to Govt. employees
o Administration
o Defense law order
o Interest payment on previously borrowed loans
o Subsidy <-- majority of tax payers money goes here. (Ill talk
about subsidy in another article)
*by the way what are assets?
Asset is something that generates money. For example you purchase a
house & rent it to someone- then youre earning money. Thus its your asset.
NPA = Non-performing Asset. = its not generating money / making losses.
(for e.g. you buy house but you neither live in it nor you rent it to others.)
Borrowing to fill up Revenue deficits is poisonous for the health of nation. (e.g.
Currently Revenue deficit of UK is 60% of its GDP)
Capital Expenditure
When Govt. makes roads, dams, bridges, ports, schools, etc.
such work is productive. It will lead to further economic Development.
So, if Govt. spends money here & runs into deficit / takes debt to finance it
= its not bad. because it'll be recovered later on.
e.g. kids learn in school, they grow up - do some job / business =
ultimately pay taxes directly / indirectly thus money is recovered. and so on...

 Another example, Govt. gives free meal via Mid-day meal schemes. Now
you might think, all those kids are poor, and theyll never earn enough money
to be in the income-tax slabs group. So whats the point in giving them free
food?
but no matter how rich / poor those kids are when they grow up- theyll
still have to buy things like petrol, matchsticks, cinema tickets, milk, food oil,
soap etc.
and on all such things, Govt. takes taxes (Vat, entertainment tax etc.) . So
even if the poor people are not paying direct income tax- they still end up
paying money to Govt. this is called indirect Tax
in short, if Govt. runs into deficit, while paying for the capital formation spending =
good for nation.
3 types of Deficit?
#1- Total or Budgetary deficit (BD)
= spending income
=Total Expenditure - total receipts ; (the income of Govt. is written as reciepts)
= [Total (Revenue + Capital) Expenditure] MINUS- [Total (Revenue + Capital)
receipts]
#2- Fiscal Deficit (FD)
BD + Market borrowing + other liabilities
This Measures total borrowing requirement of govt from
1. internal
2. external sources
#3- Primary Deficit / Non Interest Deficit
=FD Interest paid
What is Monetized Deficit?
Ans. That is When RBI prints more currency notes to fill up Govt.s deficit.
(Technically its RBI selling Govt. treasury bills in market & giving money to Govt.)
To finance the Deficit, where does Govt. get money from?
1. Govt Savings
2. PSU Surplus
3. Budget surplus
4. Public Borrowing (if Govt. has low cash on above 3 items) ->> this is
public DEBT. (via treasure bills etc)
5. External Assistance (borrow from World Bank , IMF etc.)
Cant we just print more currency notes to pay-off the debts?
Weve lot poor people in India, how about RBI printing 1LaKh rupee
notes, & giving that to each poor family, then all our poverty problems will
solve isnt it?
Nope, its not that easy.

 When each poor has 1 Lakh rs. In his pocket, hell go to market & buy 1
kg potato.
Ultimately there will be shortage of potato because every poor will have
more money.
So then, some poor will offer the veggie vendor- 30,000 Rs. Just for one kg
potato
Then some other will offer 40,000 Rs. And so on.
At the end, they wont be able to buy much potato even with 1 Lakh rs. In
their pocket. This is inflation
So printing more money to solve problems doesnt help= youve to
produce more products as well so that people can buy it using their money.
Ok so in short, Govt. borrows money from somewhere to finance its gaps (deficit)
thats called Deficit Financing.
Whatre the uses of Deficit Financing?
Use #1 Fighting Depression / Recession ( Keynesian Theory)
In 1930, an Economist named JM Keynes gave this concept.
during recession there is low demand in market because people dont
have enough money to buy things.
So, if Govt. starts some project, people get employment= theyve money =
theyll buy something = boost in production = boost in economy.
Like Hoover Dam was made during 1930s recession in America.
This is dig wells and fill wells
Use #2 Economic Development
Suppose you want to start a canteen, but dont have enough money. So
you can do two things
o Work as a waiter in someone elses canteen until you save enough
money to buy your own canteen (but this will take a long time)
o Or, borrow loan from bank to start a canteen (quick solution)
same way
Developing countries (3rd world) Dont have enough money, so this way
fast capital formation can be done. (borrow money to make Dams, roads)
Thus Deficit financing Breaks bottlenecks, structural rigidities.
Negative effect of Deficit Financing
Increase inflation [like I told ago- poors & potato]
Changes pattern of investment
Forced savings (since everything Is so costly, you cant buy it, so youll
park your money in the Bank account as savings.)
Use #3 in War

 During 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.)
For Example, Germany printed more money during World war 1 (1914-18)
But then Inflation destroyed German moneys value.
Thats why there will be steep inflation after war. (poor potato.)
USSR did the reverse of it- it refused to pay loans in 1917 thats called
repudiation
SAFETY LIMITs FOR DEFICIT FINANCING
TO PREVENT INFLATION deficit financing should be made so that it
leads to capital formation
o
Means Govt. must not use the money to pay interest / subsidy /
salary.

surplus money must be sucked away from market by higher tax- loan
interest

Newly created (printed) money used in capital formation Which have

short gestation period*
o Means you print more money to build a dam but it takes long years
to build dams. Thus you wont be able to recover the costs quickly =
during this time, it spoils market with inflation.
o If you use newly printed money to build a superfast highway (which
takes quite less time compared to Dams) then youll recover the money
quickly.
o
Again you might think how can Govt. recover money used in
building roads?
o Ans- more roads = more transport & business = more Sales / Excise
/ GST / VAT etc taxes.
Import of luxury items must be discouraged
o Suppose youre a road contractor, and Govt. gave you payment for
building a highway.
o But you use that money to buy expensive imported perfumes / gold
watches/ i-pods!
o that doesnt help the Indian Economy. Thats why.
Now moving to another partPublic Debt
When does Govt. borrow from public?
1. When Govt. doesnt have enough surplus money.

2. When Taxes cant be increased beyond a level (not like you can ask every
middle-class man to pay 1 Lakh rs. To help build the dams/highways)
3. When printing more money is making inflation (after safe limit)
How does Govt. borrow from public?
One example is By issuing
o Kisan Vikas Patra,
o Indira vikas patra
o Narmada Vikas patra
o
The money gathered from such certificates is used for building
dams & other things.
o And the advantage is, Govt. will double your money after some 1015-20 years. So Govt. doesnt have to repay you interest every month /
year.
o So its in a way- loan taken from you (the public) by the Govt.
Via Treasury bills
here RBI (have to) buy Govt. treasury bills- gives money to Govt. & sells
these bills in Capital market*.
When you buy a Govt. security- you can be sure: its safe and give you
good profit- thats why its called Gild Edged market
It deals with Govt. & semi Govt. securities
Generally commercial banks (have to) purchase Govt. securities
(remember the SLR: statutory liquidity ratio)
SLR = banks to invest a certain percentage of their liabilities in
government securities the rate was
o 38.5 per cent in 1990
o 25 per cent in 1997
*{will write in detail about capital market, in another article}
Whats the Treasury bill?
When Govt. has small temporary gap/deficit in the Revenue part, itll sell
the treasury bills to RBI.
RBI has to buy it. (because there is some law / deal)
Then RBI sells it to Commercial Banks (thus recovers money)
But here as you can see money is just printed / given without actual
creation of any direct physical product so this is bad for economy in long run.
Debt trap
When you borrow just to pay your previous debts.
That is the act of borrowing money just to keep up with debt servicing*
*Debt servicing = interest + installment payment
(FRBM) Fiscal Responsibility + Budget Management Bill (2000)

It was made to eliminate fiscal deficit

It put limits on central governments borrowings, debt, deficits
It said that total liabilities of central government should not exceed 50 per
cent of GDP. (it was 76% in 2002.)
However its provisions are diluted now, because Govt. had to pay lot
money due to 6th pay Commission / debt waiver & recession.
Separate Public debt Management office
Currently RBI is responsible for managing Govt.s debt.
But as you know- RBI is also responsible for monetary policy (control
money supply + inflation via CRR, SLR, Repo etc.)
Both tasks are conflicting with each other.
On one hand, RBI has to print more money / sell Govt.s treasury bills in
market to fill Govt.s deficit
On the other hand same RBI also has to control money supply in market
in such a way that there is no inflation.
Thats why there are talks of separate debt Management office other than
RBI.