Primary deficit in a government budget will be zero, when ______. (Choose the correct alternative) (a) Revenue

Question 16 of 54

Q. Primary deficit in a government budget will be zero, when ___________. (Choose the correct alternative)

(a) Revenue deficit is zero

(b) Net interest payments are zero

(d) Fiscal deficit is equal to interest payment

Punjab PsebCBSE Class XII Board 2019Subjective· 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 net interest payments. For primary deficit to be zero, fiscal deficit must equal net interest payments — making option (d) the correct answer.

Let’s first be clear on what primary deficit actually means. In government budgeting, the primary deficit is the fiscal deficit excluding the interest payments the government has to make on its past borrowings. Why do we care about this? Because interest payments are not discretionary spending in the current year — they are a legacy cost from earlier deficits. By stripping them out, the primary deficit tells us whether the government’s current fiscal operations (spending minus non-interest revenue) are adding to the debt burden on their own merit.

The formal relationship is:

\text{Primary Deficit} = \text{Fiscal Deficit} - \text{Net Interest Payments}

Where net interest payments are the interest the government pays on its debt minus any interest it receives on loans it has given out.

Now, the question asks: when will primary deficit be zero? Set the formula to zero:

0 = \text{Fiscal Deficit} - \text{Net Interest Payments}

This directly gives:

\text{Fiscal Deficit} = \text{Net Interest Payments}

So the condition is that the fiscal deficit is exactly equal to the net interest payments. That is option (d).

Let’s quickly check why the other options are wrong:

(a) Revenue deficit is zero — Revenue deficit is about current revenue and current expenditure (revenue account). It has no direct arithmetic link to primary deficit. You can have zero revenue deficit but still have a large fiscal deficit (if capital spending is high), and therefore a non-zero primary deficit. …

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Q.Primary deficit in a government budget will be zero, when ___________. (Choose the correct alternative)

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