Monday, 16 June 2014

India should gradually reduce fiscal deficit: IMF- WHAT IS FISCAL DEFICIT?




Every year, the Government puts out a plan for it's income and expenditure for the coming year. This is, of course, the annual Union   Budget.

"A  budget   is   said   to   have   a   fiscal deficit   when   the   Government's   expenditure   exceeds it's income." 

When   this   happens,   the   Government   needs additional   funds. The Government can arrange these funds by borrowing. The   Government can borrow either from the citizens themselves or from other countries or 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; or
  3. print   new   currency   notes   to   pay   back   the   debt   – also called debt monetization. 
The first option is not desirable. That leaves   the   second   and   third   options.   While   the   second option sounds like the best one, it is easier  than said  done.  The third option is dangerous and can act like an unfair and invisible tax on the people of a country. The effect of debt monetization is inflation, which acts  like an invisible tax on all the people of a country.  

Fiscal deficit is not necessarily a bad thing. However, large and persistent fiscal deficit can be an indication of several worrying signs in the economy.  

It can   mean   that   the   Government   is   spending   money   on unproductive programmes which do not increase economic productivity.   It   can   also   mean   that   the   tax   collection machinery is not effective so that a significant proportion of people get away without paying their due taxes. 

In any case, large fiscal deficit significantly increases  the chances of inflation in the economy  which is an invisible tax on every citizen.  In milder forms, high inflation and a large fiscal deficit lead to a weaker national currency (imports become expensive) and reduce the credit­worthiness of the country.

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  1. Very nice post thank you for sharing this the subjects themselves or from different nations or associations like the World Bank or the IMF. The cash obtained by a country's Government is called open obligation. As on some other obligation, the Government guarantees to pay a specific rate of intrigue. To pay this enthusiasm for the future, the Government has three choices: increment the measure of expenses gathered by expanding the assessment rates. help animate financial development with the goal that duty gathering consequently increments

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