explain the implications of fiscal deficit
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1. Debt Trap:
Fiscal deficit indicates the total borrowing requirements of the government. Borrowings not only involve repayment of principal amount, but also require payment of interest.
Interest payments increase the revenue expenditure, which leads to revenue deficit. It creates a vicious circle of fiscal deficit and revenue deficit, wherein government takes more loans to repay the earlier loans. As a result, country is caught in a debt trap.
2. Inflation:
Government mainly borrows from Reserve Bank of India (RBI) to meet its fiscal deficit. RBI prints new currency to meet the deficit requirements. It increases the money supply in the economy and creates inflationary pressure.
3. Foreign Dependence:
Government also borrows from rest of the world, which raises its dependence on other countries.
4. Hampers the future growth:
Borrowings increase the financial burden for future generations. It adversely affects the future growth and development prospects of the country.
Fiscal deficit indicates the total borrowing requirements of the government. Borrowings not only involve repayment of principal amount, but also require payment of interest.
Interest payments increase the revenue expenditure, which leads to revenue deficit. It creates a vicious circle of fiscal deficit and revenue deficit, wherein government takes more loans to repay the earlier loans. As a result, country is caught in a debt trap.
2. Inflation:
Government mainly borrows from Reserve Bank of India (RBI) to meet its fiscal deficit. RBI prints new currency to meet the deficit requirements. It increases the money supply in the economy and creates inflationary pressure.
3. Foreign Dependence:
Government also borrows from rest of the world, which raises its dependence on other countries.
4. Hampers the future growth:
Borrowings increase the financial burden for future generations. It adversely affects the future growth and development prospects of the country.
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