A government’s interest payments rise by Rs 50 crore and, in the same year, it cuts subsidies by Rs 50 crore. All its other receipts and expenditures stay the same. What happens to its revenue deficit, fiscal deficit and primary deficit?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Revenue deficit and fiscal deficit do not change; primary deficit falls by Rs 50 crore
Interest and subsidies are both revenue expenditure. A rise of 50 in one and a cut of 50 in the other leave revenue expenditure, and so total expenditure, the same.
Revenue deficit: unchanged
Fiscal deficit: unchanged
Primary deficit = fiscal deficit − interest payments. The fiscal deficit is the same but interest is 50 higher, so the primary deficit falls by Rs 50 crore.
NCERT (2026-27): “Revenue Expenditure … The main items of non-plan expenditure are interest payments, defence services, subsidies, salaries and pensions. …” “5.2.1 Measures of Government Deficit … 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” |