EXPLAIN IMPLICATIONS OF FISCAL DEFICIT . 6 MARKS
High fiscal deficit can have the following implications.
1. Inflation: The main source of borrowings for the government is the central bank from which it borrows in the form of deficit financing (i.e. printing of new currency notes). This deficit financing increases the circulation of money in the economy and thereby, causes inflation.
2. Economic and political interference by the developed countries: To cover the deficit, the government can also borrow from the government of other countries or from international monetary institutions (such as the World Bank, IMF, etc.). Such a borrowing, however, is associated with economic and political interference and increases the dependence of the borrowing country on the lending country.
3. Burden on future generations: A higher borrowing mounts a burden on the future generations who become liable to repay the amount of borrowing and the interest thereon.
4. Increased possibility of debt trap: Higher borrowings, as necessitated by high fiscal deficit, implies higher interest payments, thereby, further increasing the revenue expenditure. With the rise in revenue expenditure, the fiscal deficit further increases, which in turn, necessitates further borrowings. Thus, a vicious circle of debt follows.