Fiscal Policy & Deficit Management: The Primary Deficit in India has fallen from 1.4% to 0.7% of GDP over three years. Does this indicate genuine fiscal improvement or merely a ref

Introduction:

The primary deficit—fiscal deficit minus interest payments—falling from 1.4% to 0.7% of GDP suggests consolidation, but its quality depends on whether it reflects structural correction or accounting effects.

Body:

On the positive side, a lower primary deficit indicates that the government is reducing its non-interest expenditure relative to revenues. This reflects improved tax buoyancy (GST and direct taxes), expenditure rationalisation, and adherence to a fiscal consolidation path post-COVID. A shrinking primary deficit is significant because it directly affects debt sustainability—if it approaches zero, debt stabilisation becomes easier provided growth exceeds interest rates.

However, the trend must be contextualised against rising interest payments, which now consume over 40% of revenue receipts. High interest burdens inflate the overall fiscal deficit even if the primary deficit declines. Thus, the reduction may partly reflect the mechanical effect of rising interest payments increasing the gap between fiscal and primary deficits, rather than deep structural reform. Additionally, compression of revenue expenditure (including subsidies) or optimistic revenue assumptions may contribute to the decline, raising concerns about sustainability. Persistently high public debt (~80% of GDP) further indicates that fiscal stress remains.

Conclusion:

While the falling primary deficit signals progress, it is only a partial indicator of fiscal health. Genuine improvement requires sustained revenue growth, rationalised expenditure, and a reduction in interest burden to ensure durable and credible fiscal consolidation.