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Government Budget and Economy — Economics STD 12 Humanities & Commerce — Question

Rajasthan BoardEnglish MediumSTD 12 Humanities & CommerceEconomicsGovernment Budget and Economy4 Marks
Question
What are implications of fiscal deficit?
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Answer

  1. Causes Inflation: An important component of government borrowing includes borrowing from the Reserve Bank of India.This invariably implies deficit financing or meeting deficit requirements of the government by way of printing more notes. This is a dangerous practice, though very convenient for the government. It increases circulation of money and causes inflation.
  2. Increase in Foreign Dependence: Government also borrows from rest of the world. It increases our dependence on other countries. Foreign borrowing is often associated with economic and political interference by the lender countries. It increases our economic slavery.
  3. Financial Burden for Future Generation: Borrowing implies accumulation of financial burdens for the future generations. It is for future generations to repay loans as well as the mounting interest there on.
  4. Deficits Multiply Borrowings: Payments of interest increases revenue expenditure of the government, causing an increase in its revenue deficit. Thus, a vicious circle set where in deficits multiply borrowings.

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