QUES – What is primary deficit and how it affects economy?
RELEVANCE – GS MAINS PAPER III
Fiscal, revenue, trade and current account deficits are widely discussed terms and most know a thing or two about them. However, economics doesn’t limit the scope of deficits to just these terms. Other than them, primary deficit is also used widely despite it being of recent origin. Primary deficit is also widely mentioned in the budget documents.
Gross primary deficit amounts to gross fiscal deficit minus interest payments. Similarly, net primary deficit amounts to interest paid minus interest receipt.
Primary deficit = Fiscal deficit-Interest payments
The excess of total budget expenditure over the total budget receipts minus borrowing in a fiscal year is known as fiscal deficit. The total borrowing that a government needs to do in order to meet its all expenses when its resources are inadequate is called fiscal deficit. If fiscal deficit is large it means large amount of borrowing has taken place.
If primary deficit of a country is shrinking it means fiscal health of the economy is improving. A shrinking primary deficit points towards better scope of an economy in the days ahead. In the budget document, primary deficit is mentioned in terms of percentage of gross domestic product (GDP). It is generally done to help in carrying out comparison and also get a proper perspective. Any government that doesn’t borrow to consume is considered to be prudent in fiscal management.
How it affects economy
Primary deficit lets us know how much borrowing has to be done by the government in order to meet expenses in addition to the interest payments. A zero primary deficit generally means that government has to resort to borrowing just to make payment of interest.