Q. Consider the following statements with respect to “Effective Revenue Deficit” (ERD):
1. It is aimed to deduct the money used out of borrowing to finance capital expenditure.
2. It is suggested by the Bimal Jalan Committee on Public Expenditure.
Which of the statements given above is/are correct?

[A] 1 only

[B] 2 only

[C] Both 1 and 2

[D] Neither 1 nor 2

Answer: A
Notes:

Effective Revenue Deficit is the difference between revenue deficit and grants for creation of capital assets.  

  • The concept of effective revenue deficit has been suggested by the Rangarajan Committee on Public Expenditure.  
  • It is aimed to deduct the money used out of borrowing to finance capital expenditure.  
  • The concept has been introduced to ascertain the actual deficit in the revenue account after adjusting for expenditure of capital nature.  
  • Focusing on this will help in reducing the consumptive component of revenue deficit and create space for increased capital spending.  
  • Though the Budget documents have given targets for revenue deficit, the amendments to the Fiscal Responsibility and Budget Management Act 2003 has proposed to substitute the definitions of “effective revenue deficit” and “revenue deficit” with those of “Central government debt” and “general government debt” respectively. 

Source: Ramesh Singh