worry about a large fiscal deficit, in India . But the question is, what is the problem with a big fiscal deficit and what is
this Fiscal deficit.
Every year, the Government puts out a plan for it’s income and expenditure for the coming year.
This is called annual Union Budget.
A budget is said to have a Fiscal Deficit when the Government’s expenditure exceeds it’s
When this happens, the Government needs additional funds. Now there are two ways for the
Government to arrange these funds
1) The Government can borrow either from the Citizens themselves.
2) Other Countries.
3) Organizations like the World Bank or the IMF.
The money borrowed by a nation’s Government is called Public Debt.
As on any other debt, the Government promises to pay a certain rate of
interest. To pay this interest in the future, the Government has three options:
1. Increase the amount of taxes collected by Increasing the tax rates.
2. Help stimulate economic growth so that tax collection automatically increases with it.
3. Print new currency notes to pay back the debt – also called Debt Monetization.
We can all agree that the first option is not desirable.
That leaves the second and third options.
While the second option sounds like the best one, It is not easier to implement
The third option is dangerous and can act like an unfair and invisible tax on the people of a country.
I’ll explain in my future posts why 3rd option is Dangerous….
Your views/feedback are welcome.