A government sells shares of a public sector undertaking worth Rs 40 crore and uses the money to pay extra interest on its past debt. All other items of the budget are unchanged. What happens to the revenue deficit (RD), the fiscal deficit (FD) and the primary deficit (PD)?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → RD rises by Rs 40 crore; FD is unchanged; PD falls by Rs 40 crore.
Interest payments are revenue expenditure, so paying Rs 40 crore more raises the revenue deficit by Rs 40 crore.
The sale of PSU shares is a non-debt creating capital receipt. In the fiscal deficit, expenditure rises by 40 and these receipts also rise by 40, so the fiscal deficit does not change. The primary deficit is the fiscal deficit minus interest payments; interest is 40 more, so the primary deficit falls by Rs 40 crore.
NCERT (2026-27): “Revenue Expenditure Revenue Expenditure is expenditure incurred for purposes other than the creation of physical or financial assets of the central government. It relates to those expenses incurred for the normal functioning of the government departments and various services, interest payments on debt incurred by the government, and grants given to state governments and other parties (even though some of the grants may be meant for creation of assets). …” “5.2.1 Measures of Government Deficit … Revenue Deficit: The revenue deficit refers to the excess of government’s revenue expenditure over revenue receipts” “5.2.1 Measures of Government Deficit … Fiscal Deficit: Fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding borrowing” “Non-debt creating capital receipts are those receipts which are not borrowings and, therefore, do not give rise to debt. Examples are recovery of loans and the proceeds from the sale of PSUs. …” “… To obtain an estimate of borrowing on account of current expenditures exceeding revenues, we need to calculate what has been called the primary deficit. It is simply the fiscal deficit minus the interest payments” |