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.
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 –
Revenue earned | Rs.100 lakh crore |
Expenses incurred (including interest payments) | Rs.130 lakh crore |
Interest payments | Rs.20 lakh crore |
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 = Fiscal deficit – Interest payments
Or
Primary deficit = Total revenue earned – Expenses incurred excluding interest payments
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.
There are ways in which the Government can correct a primary deficit in its accounts. These ways are as follows –
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.
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.
Refer to the table below to understand the difference between primary deficit, fiscal deficit and revenue deficit.
Points of difference | Primary deficit | Revenue deficit | Fiscal deficit |
Meaning | The difference between the fiscal deficit and the interest payments. | The deficit between the revenue expenditure and revenue receipts | The difference between the total revenue and total expenditure, including interest payments |
Formula | Fiscal deficit – interest paymentsOr Total revenue – total expenditure – interest payments | Revenue receipts – revenue expenditure | Total revenue – total expenditure |
Implication | Shows the deficit incurred without factoring in interest on past loans | Shows the borrowing needed to meet day-to-day expenses | Shows the borrowings needed to meet the aggregate expenses |
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).
Ans: The primary deficit indicates the borrowings that the Government needs to make to meet its expenses if the interest payments are not considered. It can also indicate the borrowing that the Government can use for its expenses without including interest payments.
Ans: Yes, the primary deficit can become zero. This would mean that the government’s fiscal deficit is equal to the interest paid on its borrowings. This indicates that the Government has to borrow additional funds simply to service the interest payments on past borrowings.
Ans: Besides the primary deficit, the Government can incur a revenue deficit and a fiscal deficit. Both these deficits indicate an excess of expenditure over revenues. The only distinguishing factor is the type of revenue and expenditure considered in calculating the deficits.
Ans: The Government primarily has two types of budgets – a revenue budget and a capital budget.
Ans: To tackle fiscal deficits, the Government can resort to borrowing or ask the Central Bank, i.e., the Reserve Bank of India (RBI), to print more money to meet its expenditure. Remember, both these measures, in extremes, are bad for the overall economy of the country.
Business
How Anti Money Laundering Combats Financial Crime?
Anti Money Laundering (AML) is a system of rules, laws, regulations, and procedures that financial ... Read More »Business
What is Salvage Value and Why is it Useful?
Salvage value, also called scrap value, is the value of a specific asset after its useful life. In ... Read More »Business
Key Difference Between Factoring and Forfaiting in Trade Finance
Factoring and forfaiting have grown in prominence as major sources of export financing. For the uni... Read More »Business
What is Factoring and its Importance in Financial Management?
Factoring is a practice in which a company buys the accounts receivable of another company at a dis... Read More »Business
What is Budget Surplus: Its Effects, Advantages and Impact with Examples
When the revenue of a government, business, or individual exceeds its expenses in a given period, i... Read More »Business
What is Balanced Budget – Components, Importance and Examples
In financial planning or the budgeting process, a balanced budget is one in which total anticipated... Read More »Business
What Does Inflationary Gap Mean in Macroeconomics?
In macroeconomics, the difference between current and potential GDP is known as a gap. This gap is ... Read More »Business
What is Accounting Conservatism in Finance and How Does it Work?
Accounting conservatism involves a conservative set of accounting guidelines wherein the worst-case... Read More »Business
Multiple Linear Regression (MLP) – Uses, Formula and Examples
Various statistical models help in establishing a relationship between different variables. Multipl... Read More »Business
What is Debt Funding and Why Should You Choose it?
A business can raise funds by borrowing through debt funding. Although debt can take many different... Read More »Business
A Beginner’s Guide to Elasticity of Demand
Elasticity of demand measures the change in demand when the price or other factors change. It measu... Read More »Business
What is Subsidy – it’s Importance, Impact, Types and Benefits
A subsidy is traditionally a form of financial assistance provided to businesses or individuals by ... Read More »Mutual Funds
Top 10 Chit Fund Schemes in India in 2023
Chit funds are one of the most popular return-generating saving schemes in India. It is a financial... Read More »Personal Loans
₹15,000 Personal Loan: Features, Benefits, EMI and Interest Rate
Financial emergencies can be short term and you might not always require a large amount to handle t... Read More »Personal Loans
Personal Loan Interest Rates in India – Charges and Processing Fee
Applying for a personal loan? Have you compared the personal interest rates and processing fees? ... Read More »Mutual Funds
10 Best Gold ETFs to Invest in India 2023 – Returns and Taxation
Gold ETFs or Gold Exchange Traded Funds are passively managed funds that track the price of physica... Read More »Health Insurance
TPA in Health Insurance – Full Form, Functions and Roles
TPA (full form – Third Party Administrator) is a licensed intermediary between health insurance p... Read More »Banking
ATM Card AMC (Annual Maintenance Charge): Explained
ATM Card AMC (Annual Maintenance Charge) is a maintenance fee levied by banks every year. This debi... Read More »Mutual Funds
Top 10 Demat Accounts in India [Lowest Brokerage Charges]
A Demat account was created to eliminate the time-consuming and inconvenient procedure of purchasin... Read More »Mutual Funds
20 Best Index Funds in India to Invest in 2023 (27th Jan)
What is an Index Fund? An index fund is a type of mutual fund or exchange-traded fund (ETF) that... Read More »All information is subject to specific conditions | © 2023 Navi Technologies Ltd. All rights are reserved.
Start Small. Dream Big.
Start your Investment Journey with just ₹10