It refers to the management of revenue and capital expenditure finances of the state.

1. Fiscal system of a country refers to the revenue and capital resources that can be raised by government, the procedure to be observed in raising and spending funds and in case of a federation such as ours the provision that governs the relationship of the constituent unit of federation. It includes with in its purview taxation, expenditure, debt management and inter- governmental fiscal relation.
2. Indian fiscal system is based on the constitution of India which is federal in character. The constitution envisages two layers of government: the Union of central government and the state government. Local bodies do not find a place in the constitution and the function and resources allotted to them are delegated by the state government.

Fiscal Policy:- It is how a government rectifies its spending levels and tax ratios to monitor and influence a nation’s economy. It is the sister strategy to Monetary Policy through which a Union Bank influences a nation’s money reserve. These uses can affect the following macroeconomic variable in the economy:

• Aggregate demand and the level of economic activity;

• The distribution of income;

• The pattern of resource allocation within the government sector and relative to the private sector.

Sources of Revenue:- The main sources of revenue are custom duties, excise duties, service tax, taxes on property, corporate taxes, and income taxes.

Sources of Expenditure:-

• Plan Expenditure includes agriculture, rural development, irrigation, and flood conrol, energy, industry, minerals, transport, and communications, etc.

Non-Plan Expenditure:- It consists of interest payment, defence, subsidies, and general services.

Public Dept:-

• Internal Debt comprises loans raised from the open market treasury bills issued to the RBI, Commercial Banks, etc.

• External Debt consists of loans taken from World Bank, IMF, ADB, and individual countries.

Deficits:- In a budget statement, four types of deficits are mentioned:

• Revenue Deficit

• Fiscal Deficit

• Capital Deficit

• Primary Deficit

(1) Revenue Deficit: There are various ways to represent and interpret a government’s deficit. The simplest is the revenue deficit which is just the difference between revenue receipts and revenue expenditures.

Revenue deficit = Revenue expenditure – Revenue receipts

(2) Capital Deficit: An imbalance in a nation’s balance of payments capital account in which payments made by the country for purchasing foreign assets exceed payments received by the country for selling domestic assets.

In other words, investment by the domestic economy in foreign assets is less than foreign investment in domestic assets. This is generally not a desirable situation for a domestic economy.

Capital deficit = Capital receipts – Disbursement on Capital acoount

Fiscal Deficit: This is the sum of. revenue and capital expenditure less all revenue and capital receipts other than loans taken. This gives a more holistic view of the government’s funding situations since it gives the difference between all receipts and expenditures other than loans taken to meet such expenditures.

Fiscal Deficit = Difference between country’s expenses and earnings

Fiscal deficit = Revenue receipts (net tax revenue+non tax revenue) + Capital receipts (only recoveries of loans and other receipts) – Total expenditure ( Plan and non- plan) .

Primary Deficit: Amount by which a government’s total expenditure exceeds its total revenue, excluding interest payments on its debt.

Primary deficit = Fiscal deficit – Interest payments.