06-08-2025 Mains Question Answer
Distinguish between fiscal deficit and primary deficit. Why is primary deficit considered a more realistic indicator of fiscal health?
Fiscal indicators help assess the soundness of a government’s financial management. Among these, fiscal deficit and primary deficit are two crucial metrics that reflect the government’s borrowing requirements. While fiscal deficit is the most commonly tracked indicator, primary deficit offers deeper insight into the quality and sustainability of fiscal policy.
Distinction between Fiscal Deficit and Primary Deficit
| Aspect | Fiscal Deficit | Primary Deficit |
| Definition | Total borrowing requirement of the government to meet its total expenditure needs | Fiscal deficit minus interest payments; reflects current year’s borrowing excluding past interest |
| Formula | Total Expenditure – (Revenue Receipts + Non-Debt Capital Receipts) | Fiscal Deficit – Interest Payments |
| Interest Payments | Included in the calculation | Excluded to isolate present fiscal stance |
| Purpose | Indicates overall resource gap in the budget | Shows borrowing driven purely by current policy decisions |
| Nature | Reflects cumulative impact of both past and present liabilities | Focuses only on present year’s discretionary fiscal operations |
| Relevance | Used as a headline indicator of fiscal imbalance | Offers a more nuanced view of government’s control over new expenditures |
| Policy Insight | Useful for tracking overall debt dynamics | Essential for evaluating the sustainability and discipline of current fiscal policy |
Why Primary Deficit is Considered More Realistic:
- More Accurate Assessment
- Excludes the burden of past decisions (interest payments) and focuses on current fiscal management.
- Provides a clearer picture of the government’s present borrowing needs.
- Better indicates the government’s current fiscal discipline and policy effectiveness.
- Policy Implementation Insights
- Helps in understanding the immediate impact of government’s fiscal policies.
- According to RBI’s December 2023 Bulletin, government borrowing significantly impacts G-sec yields, making primary deficit monitoring crucial.
- Enables better assessment of debt sustainability and fiscal consolidation efforts.
- Economic Planning Benefits
- Assists in formulating targeted fiscal policies and expenditure priorities.
- Reflected in recent budget allocations where infrastructure spending increased to 16% in 2025 from 6.63% in 2024.
- Helps maintain sustainable debt levels, crucial given India’s current public debt-to-GDP ratio of around 83%.
- Global Comparability:
- Institutions like the IMF, World Bank, and credit rating agencies use primary deficit as a core metric for comparing fiscal discipline across countries.
The ability to distinguish between inherited burdens and current fiscal decisions makes primary deficit a more realistic indicator for assessing fiscal health, as demonstrated by its role in shaping policies like the Fiscal Responsibility and Budget Management (FRBM) Act and NK Singh Committee recommendations for fiscal consolidation.