Primary deficit can be zero if _____ . (Fill in the blank with correct alternative) (A) Fiscal deficit = Inter

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Q. Primary deficit can be zero if _________ . (Fill in the blank with correct alternative) (A) Fiscal deficit = Interest payments (B) Fiscal deficit < Interest payments (C) Fiscal deficit > Interest payments (D) Revenue deficit < Fiscal deficit

Manipur CohsemCBSE Class XII Board 2020Subjective· 1mImportance★★★★★

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Concept understanding — Fiscal Deficit Definition

Fiscal Deficit: What It Really Means

Think of your household budget. If your monthly expenses exceed your income, you have a shortfall. You cover it by borrowing from someone — a friend, a bank. That shortfall is your personal "deficit."

Now scale that up to the entire country. The government earns money (mostly through taxes) and spends money (on roads, salaries, defence, subsidies). When the government's total spending exceeds its total non-borrowed income, it runs a fiscal deficit. It's the gap the government must fill by borrowing.

The Precise Definition (NCERT Class 12)

The NCERT Macroeconomics textbook defines fiscal deficit as:

Fiscal Deficit = Total Expenditure − Total Receipts excluding borrowings

Let's unpack that. "Total Receipts excluding borrowings" means all the money the government gets without going into debt — mainly tax revenue and non-tax revenue (like fees, dividends from public sector companies, etc.). Borrowings are not counted as "receipts" here because they are the source of finance for the deficit, not income.

So the formula is:

\text{Fiscal Deficit} = \text{Total Expenditure} - \text{(Revenue Receipts + Non-debt Capital Receipts)}

Where:

Total Expenditure = Revenue Expenditure (day-to-day running costs) + Capital Expenditure (building assets like highways, dams)
Revenue Receipts = Tax revenue + Non-tax revenue (fees, fines, dividends)
Non-debt Capital Receipts = Money from selling government assets (disinvestment), loan recoveries — these don't create debt

The fiscal deficit is not the same as "total borrowing." It is the amount that must be borrowed. In practice, the government covers this gap by:

Borrowing from the market (selling bonds)
Borrowing from the RBI
Drawing down cash balances

Why Does It Matter?

A fiscal deficit isn't automatically bad — it depends on why it exists and how it's financed.

When it's good: If the government borrows to build a national highway network, that creates jobs, boosts transport, and generates future tax revenue. The deficit is an investment.

When it's bad: If the deficit is caused by wasteful subsidies or paying salaries without any productive outcome, and the government keeps borrowing year after year, it piles up debt. Future generations must repay it. Large deficits can also fuel inflation if the RBI prints money to finance them.

Important

The fiscal deficit is the single most watched number in the Union Budget. It tells you how much the government is living beyond its means. A high fiscal deficit (say, above 6% of GDP) signals stress; a low one (below 3%) signals fiscal discipline.

A Simple Diagram (in words)

Imagine a vertical bar representing total government expenditure. Below it, a shorter bar represents total receipts (excluding borrowings). The gap between the top of the expenditure bar and the top of the receipts bar is the fiscal deficit. That gap is filled by borrowings.

Total Expenditure:  |████████████████████████████████|
                    |                                |
                    |           FISCAL DEFICIT       |
                    |           (borrowings)         |
Total Receipts:     |████████████████████████        |
                    |                                |
                    |   Revenue + Non-debt Capital   |
                    |________________________________|
``` …

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Primary deficit equals fiscal deficit minus interest payments. Therefore, primary deficit is zero when fiscal deficit exactly equals interest payments — option (A).

The primary deficit is a measure that strips away the government's past borrowing obligations to show how much of the current year's fiscal deficit is due to fresh, discretionary spending. The logic is simple: a government's total borrowing (fiscal deficit) includes two components — the interest it must pay on its existing debt (which is a committed, non-discretionary expense) and the net new borrowing for current programmes. By subtracting interest payments from the fiscal deficit, we get the primary deficit, which tells us whether the government is borrowing more than it needs just to service old loans.

\text{Primary deficit} = \text{Fiscal deficit} - \text{Interest payments}

Now, if the primary deficit is zero, that equation becomes:

0 = \text{Fiscal deficit} - \text{Interest payments}

Rearranging:

\text{Fiscal deficit} = \text{Interest payments}

This means the government's total borrowing in the year is exactly equal to the interest it has to pay on its past debt. It is not taking on any additional debt beyond what is needed to cover interest — in other words, its non-interest expenditure is fully covered by its non-interest revenue. This is often seen as a sign of fiscal discipline, because the government is not adding to its net debt burden beyond the rollover of interest. …

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Q.Primary deficit can be zero if _________ . (Fill in the blank with correct alternative) (A) Fiscal deficit = Interest payments (B) Fiscal deficit < Interest payments (C) Fiscal deficit > Interest payments (D) Revenue deficit < Fiscal deficit

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