What is Primary Deficit: Its Example, Formula and Impact on Economy

Primary Deficit is the difference between the current year’s fiscal deficit (total income – total expenditure of the government) and the interest paid on the borrowings of the previous year. Once calculated, the primary deficit reflects the amount the Government needs to borrow to meet its current year’s expenses. In other words, the primary deficit is the amount that reflects the total expenditure of the Government against its total income.

Primary Deficit Example

To understand the concept of primary deficit, let us consider the following example. 

Say, in a financial year, the financial books of the Indian Government show the following data –

Given these figures, the fiscal deficit of the Government will be calculated as follows –

Fiscal deficit = Revenue earned – expenses incurred 

= Rs.100 lakh crores – Rs.130 lakh crore

= Rs.30 lakh crore

However, to calculate the primary deficit, the interest payment will have to be excluded from the calculation.

Primary deficit = Fiscal deficit – Interest payments

= Rs.30 lakh crore – Rs.20 lakh crore

= Rs.10 lakhs crore 

Primary Deficit Formula:

Primary deficit = Fiscal deficit – Interest payments

Or

Primary deficit = Total revenue earned – Expenses incurred excluding interest payments

Implications of Primary Deficit

The primary deficit shows how interest payments strain the Government’s revenue. By comparing the fiscal deficit and primary deficit, you can find out the interest payments that the Government is paying on its past borrowings. 

This indirectly indicates the size of the borrowings and shows whether the Government depends on borrowings to meet its expenses. A major difference between the two deficit figures shows that the Government has borrowed a considerable amount of money which is eating into its revenue. On the other hand, a low difference shows limited borrowings.

If the primary deficit is zero, it means that the Government is borrowing only to meet the interest payable on previous loans. This means that the strain of the previous borrowings is high and is forcing the Government to borrow more.

What are the Measures to Correct Primary Deficit?

There are ways in which the Government can correct a primary deficit in its accounts. These ways are as follows –

1. Reducing the Expenses

If the Government reduces its expenditure, it can automatically reduce the fiscal deficit. As the fiscal deficit is reduced, it brings down the primary deficit too.

2. Increasing the Revenue

Alternatively, if the Government increases its revenue, the fiscal deficit falls. This also causes the primary deficit to fall as the Government gets sufficient funds to meet its expenses without having to borrow. As borrowings are reduced, the interest payment on the same is also reduced, and the primary deficit can be corrected. 

What is the Difference Between Primary Deficit, Revenue Deficit and Fiscal Deficit?

Refer to the table below to understand the difference between primary deficit, fiscal deficit and revenue deficit.

Final Word

The primary deficit is an important figure in measuring a country’s financial stability. It indicates the pressure of previous debts that might force the Government to borrow additional funds to service them. If the deficit reduces, it indicates that the government’s financial health is also improving. Every year, in the Union Budget, the fiscal deficit and primary deficit figures are present so that the public knows the Government’s financial health. Usually, the statistics are represented as a percentage of the GDP (Gross Domestic Product).

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