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In the context of budgetary deficits, consider the following statements with reference to Primary Deficit:
Primary Deficit is the total government borrowings available to utilise after interest payments.
Primary Deficit in India is always higher than the Fiscal Deficit.
Which of the statements given above is/are correct?
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'A'. Can you explain this answer?
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Most Upvoted Answer
In the context of budgetary deficits, consider the following statemen...
Primary deficit refers to the difference between the government's total expenditure excluding interest payments and its total revenue. In other words, it represents the borrowing requirement of the government after accounting for interest payments. Let's analyze the given statements to determine their correctness:
Statement 1: Primary Deficit is the total government borrowings available to utilize after interest payments.
This statement is correct. The primary deficit reflects the borrowing needs of the government to finance its expenditure, excluding interest payments. It indicates the amount of borrowing available for productive purposes such as infrastructure development, social welfare programs, etc.
Statement 2: Primary Deficit in India is always higher than the Fiscal Deficit.
This statement is incorrect. The primary deficit in India may or may not be higher than the fiscal deficit. The fiscal deficit represents the total borrowing requirement of the government, including both interest and non-interest expenditures. It reflects the gap between total expenditure and total revenue. The primary deficit, on the other hand, excludes interest payments from total expenditure.
To understand the relationship between primary deficit and fiscal deficit, we need to consider the interest payments made by the government. If the interest payments are higher, the primary deficit will be lower compared to the fiscal deficit. Conversely, if the interest payments are lower, the primary deficit will be higher than the fiscal deficit.
In India, interest payments on government debt constitute a significant portion of total expenditure. Therefore, the primary deficit is often lower than the fiscal deficit. This implies that a substantial amount of government borrowing is utilized to meet interest obligations rather than for productive purposes. However, it is important to note that the relationship between primary deficit and fiscal deficit can vary depending on the economic conditions and fiscal policies pursued by the government.
In conclusion, the correct statement is:
a) 1 only - Primary Deficit is the total government borrowings available to utilize after interest payments.
Statement 1: Primary Deficit is the total government borrowings available to utilize after interest payments.
This statement is correct. The primary deficit reflects the borrowing needs of the government to finance its expenditure, excluding interest payments. It indicates the amount of borrowing available for productive purposes such as infrastructure development, social welfare programs, etc.
Statement 2: Primary Deficit in India is always higher than the Fiscal Deficit.
This statement is incorrect. The primary deficit in India may or may not be higher than the fiscal deficit. The fiscal deficit represents the total borrowing requirement of the government, including both interest and non-interest expenditures. It reflects the gap between total expenditure and total revenue. The primary deficit, on the other hand, excludes interest payments from total expenditure.
To understand the relationship between primary deficit and fiscal deficit, we need to consider the interest payments made by the government. If the interest payments are higher, the primary deficit will be lower compared to the fiscal deficit. Conversely, if the interest payments are lower, the primary deficit will be higher than the fiscal deficit.
In India, interest payments on government debt constitute a significant portion of total expenditure. Therefore, the primary deficit is often lower than the fiscal deficit. This implies that a substantial amount of government borrowing is utilized to meet interest obligations rather than for productive purposes. However, it is important to note that the relationship between primary deficit and fiscal deficit can vary depending on the economic conditions and fiscal policies pursued by the government.
In conclusion, the correct statement is:
a) 1 only - Primary Deficit is the total government borrowings available to utilize after interest payments.
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Community Answer
In the context of budgetary deficits, consider the following statemen...
In order to meet the extra expenditure beyond the income, government may resort to borrowings:
- Borrowing requirement of the government includes interest obligations on the accumulated debt.
- To obtain an estimate of borrowing on account of current expenditures exceeding revenues, we need to deduct these interest obligations on accumulated debt from the total deficit of the government, which gives the Primary deficit of the government. Primary deficit is measured to know the amount of borrowing that the government can utilize, excluding the interest payments. Hence, statement 1 is correct.
- It is simply the fiscal deficit minus the interest payments. Hence statement 2 is not correct.
- Primary deficit = Fiscal deficit – net interest liabilities.
- Net interest liabilities consist of interest payments minus interest receipts by the government on net domestic lending.
- A decrease in primary deficit shows progress towards fiscal health. Hence, when the primary deficit is zero, the fiscal deficit becomes equal to the interest payment. This means that the government has resorted to borrowings just to pay off the interest payments. Further, nothing is added to the existing loan.
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In the context of budgetary deficits, consider the following statements with reference to Primary Deficit: Primary Deficit is the total government borrowings available to utilise after interest payments. Primary Deficit in India is always higher than the Fiscal Deficit. Which of the statements given above is/are correct?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer?
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