CA Foundation · Business Economics · Public Finance
A government's fiscal deficit is Rs 30,000 crore and its interest payments are Rs 18,000 crore. Which statement about the budget is correct?
Primary deficit is Rs 12,000 crore, found by deducting interest of Rs 18,000 crore from the fiscal deficit of Rs 30,000 crore. Because borrowing of Rs 30,000 crore exceeds this, Rs 18,000 crore of the borrowing is used to service earlier debt rather than fund new spending.
- APrimary deficit is Rs 48,000 crore, showing borrowing is entirely for current needs
- BPrimary deficit is Rs 12,000 crore, so part of borrowing is used to pay interest on earlier debtCorrect
- CPrimary deficit is Rs 12,000 crore, so borrowing is entirely for new spending
- DPrimary deficit is Rs 18,000 crore, equal to interest payments
Explanation
Primary deficit = 30,000 - 18,000 = Rs 12,000 crore. Since the fiscal deficit (total borrowing) exceeds the primary deficit by Rs 18,000 crore, that portion of borrowing goes to pay interest on past debt. Saying borrowing is wholly for new spending ignores the interest component.
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