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1)is fiscal deficit inlationary in nature ???

2) do borrowings by govt increase the money supply in the market ???

experts , amit,shrinivasan or any other person confident n sure about the concepts

plsssssss n thanks

Friends let me help you all in mastering this concept but for that first clear-up the cobweb. Woooosh!!! Ctrl+Del...everything cleared-up.

Now, let's start it from the very scratch. At first, let me address to all those who are saying borrowing from RBI in order to finance fiscal deficit. Buddies, why are you considering borrowings here? The question has not asked you whether government is financing the fiscal deficit or not. It is just the "fiscal deficit" that's why put it in quotes. This means the gap between the government earnings and spendings has widened-up. Now, when does this happen? Obviously, when government earnings fall or when government spendings increases!

When government earnings falls, it is not at all inflationary. It's good no!! On the other hand, when government spendings increase, then it implies greater flow of money with in the economy due to more spendings on employment generations schemes, poverty alleviation programmes, etc. The greater flow of money is not because of borrowings from RBI, as that would imply deficit financing, but here we are just concerned about fiscal deficit and not aftereffect of it.

Now, when the people who were unemployed earlier to increased government spendings get jobs and will have increased income in their hands, will finally demand more. This obviously will add to the pressure and what do you think the producers can cope-up with this raised pressure in the short-term? Absolutely not! THIS IS WHAT WE MEAN BY INFLATIONARY PRESSURE due to shortfall of supply!

Please note that the inflationary pressure will be huge, if the economy is originally at or closer to full-employment level, wherein, no or very less amount of resources are left unutilised.

On the other hand, if the economy is far-far away from the full-employment level, then it has buffer resources that are unutilised or unemployed. So, whenever there arises a situation of excess demand due to rise in income, then these unutilised resources will be employed and shortfall of supply will be mitigated by producing more to fulfil excess demand.

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1) Yes,fiscal deficit is inflationary in nature.
•Fiscal deficit point towards the borrowing req. of the govt.
•When the govt. borrows money ,it leads to an increase in the money supply.
•increase in money supply causes increase in PRICE LEVEL (pointing towards inflation)
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basically it is ncert question , question 13 , the answer given by meritnation is really fishy
i also thought the same as u
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2) Deficit financing.
It is one of the source of "financing" FISCAL DEFICIT.
•It implies printing of new currency.
•When govt. requires loan-
• borrows from RBI by selling its treasury bills.
• These leads to printing of new currency in the economy to grant loan to the govt.
• This increases the supply of money in the economy.
[Increase in supply of money ----increase in price level ---- leading to inflation].
Here it implies that fiscal deficit will lead to an inflationary spiral.
The source of financing fiscal deficit too leads to an inflationary spiral.

Lastly, nothing is mentioned about its exclusion from the syllabus.
So,for being on the safer side do go through "implications & measures to correct revenue,fiscal, primary deficit"

Hope it helps :)
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I read the answer given in the meritnation just now.
It's so complicated.
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thanks amit 😊😊😊
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my pleasure :) #kunal
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fiscal deficit is not always inflationary in nature. Although , it depends upon the use of borrowings, if its use for productive purpose then it's not inflationary.
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It's one of the major implications is that it leads to an inflationary spiral.
In general terms we always state that it is inflationary in natute.
It may not be inflationary in nature in some cases -
• when there is excess capacity in the economy.
• or the loan taken for productive purpose.
But I don't think these points are included for 12th syllabus.
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n suppose if the govt takes the borrowings n invest it in foreign country then also it wont be inflationary as money supply in our country hasnt gone up
but if the investment is in our country then the money supply in our country will increse then it will lead to infltaion wont it ????
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hat bc
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Yes,it must.
We are talking in context of fiscal deficit.
Now suppose the excess capacity is not used.If the govt. borrows in that case then it does not leads to inflation.
But in general it will lead to inflation.

There are certain instances in which it will not lead to inflation but that is out of our syllabus.(ex: deflationary gap exists)

In exam if we get any type of question like this we should mention our relevant reasons with the answer. That would be enough to fetch good marks.
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ohhhkkkkkk , thnx amit u always a great help 😊
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