May 29, 2000|
Primary Surplus – The right way forward
India’s fiscal deficit for FY01 has been placed at Rs 1,112 bn. That is more than double the deficit in FY94. During the same period, India's interest outgo increased over 175% to Rs 1,013 (FY01BE). The interest expenditure, in effect, accounts for a major chunk of the fiscal deficit.
In view of the rise in the interest burden, it is essential to understand the concept of primary deficit. It is the deficit of the government before making interest payments. In effect a country that is looking at reducing its debt burden should run a surplus on the primary account. A country, like India, which runs a deficit on the primary account, has to borrow from the markets to service previously borrowed debt (signs of a debt trap).
In the budget document for FY01, the central government is likely to run a deficit of Rs 100 bn. This is negligible, given the huge quantum of debt that is owed by the government (over 50% of GDP). But one should not take this figure for what it is. The government had projected a primary surplus of Rs 81 bn for FY00. However, by the time the year came to an end, there was a deficit of over Rs 175 bn.
Nevertheless, the primary deficits are becoming smaller and this should augur well for the Indian economy. It would represent the first step towards fiscal prudence. The government would not need to borrow more for servicing past debt. And as we move towards a primary surplus scenario, can India look forward to slowly repaying its past debt. Not as yet. That’s because the government’s overall expenses continue to exceed revenues. The fiscal deficit, which was 6.3% in FY94, is estimated at 5.1% of GDP in FY01. Infact, the projected fiscal deficit of Rs 1,112 bn is also the borrowing target for the year.
But then one cannot expect the situation to improve overnight. A step at a time needs to be taken. Having a surplus in the primary account is the right way forward.
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