If the news relating to fiscal deficit was bad in the Budget, in regard to the primary deficit —- that is, net borrowing to meet expenditure other than interest payments —- the tidings are worse. Primary deficit, measured by the difference between fiscal deficit and interest outgo, is set to reach a level of Rs 175,485 crore during the current year or 3% of the GDP from Rs 133,821 crore or 2.5% in 2008-09.
This represents a reversal of the situation that had obtained as recently as in 2006-07 and 2007-08 when there was a primary surplus, usually viewed as a pathway to sustainable debt burden.
The transition in the primary balance from a surplus to deficit in the last fiscal is a setback to the exchequer and the fact that this state of affairs will not only persist but is likely to deteriorate is hardly edifying.
In much of the discussion on the Budget, the focus is on the revenue deficit and the fiscal deficit.
But, primary deficit is an equally important indicator of the fiscal performance and though this figure is set out in the Budget documents, it does not figure prominently in the analysis of the Budget.
In 2008-09, the incurrence of a high order of primary deficit is mainly consumption-driven; as much as Rs 89,256 crore or 67% of the net borrowing is on account of current expenditure, with only the balance of 33% deployed in the creation of productive assets.
During the current year, although the primary deficit is set to record an incremental growth of Rs 41,664 crore, the increase due to consumption is budgeted at only Rs 8,292 crore while primary deficit due to investment will leapfrog from Rs 44,565 crore to Rs 77,936 crore or by Rs 33,371 crore.
In the event, primary deficit-investment is slated to climb to 1.3% of GDP from 0.8% in 2008-09, while the primary deficit-consumption may stay static at 1.7% in both these years.
Interest payments are obligatory in nature and hence, if primary deficit shrinks or if there is a primary surplus, it denotes an improvement in fiscal health.
The opposite has been true of late and a rising primary deficit implies that not only has the national debt risen but also that the ratio of debt to GDP may have burgeoned.
There is no mystery how this has come about. Global economic meltdown plus our sputtering economy have forced the government to administer fiscal stimulus packages as well trimming of the tax rates. There have been also big ticket spending on account of subsidy, wages and arrears et al.
Borrowing route was taken to finance this high order of spending.
As Martin Feldstein of Harvard University had observed in his L K Jha Memorial Lecture in 2004, budget deficits are popular because they allow higher levels of spending and lower levels of taxation, while shifting the fiscal cost to future generations.
“Deficits impose burdens on the economy that, unlike the very tangible benefits of more spending and lower taxes, are not directly visible to current voters.”
Fiscal deficit shows the need for additional resources, generally speaking to bridge the gap between total spending and total revenue plus non-debt receipts.
But, since a sizable part of resources so mobilised may be utilised to meet the interest outgo, current allocations hinge on net borrowings or the primary deficit as revenue usually falls short of government’s non-interest outlays. The trend in respect of primary deficit during the last fiscal and the projection for this year reveals the fundamental disequilibrium in the Union finances.
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