Explain the implications of fiscal deficit …

(i) Debt trap. Fiscal deficit, i.e., borrowing creates problems of not only
(a) repayment of loans but also of (b) payment of interest. As the government borrowing increases, its liability in future to
repay loans along with interest thereon also increases. Payment of interest increases revenue expenditure leading to a
higher revenue deficit. Increased revenue deficit may further lead to more borrowing and more interest payment.
Ultimately government may be compelled to borrow to finance even interest payment leading to emergence of a vicious
circle and debt trap.
(ii) Wasteful expenditure. High fiscal deficit generally leads to wasteful and unnecessary expenditure by the
government. Therefore, fiscal deficit should be kept as low as possible.
(iii) Inflationary pressure. As government borrows mainly from RBI which meets this demand by printing of more
currency-notes (called deficit financing), it results in circulation of more money. This may cause inflationary pressure in
the economy.
(iv) Retards future growth. The entire amount of fiscal deficit, i.e., whole borrowed amount is not available for growth
and development of economy because a part of it is used for interest payment. Only primary deficit (fiscal deficit -
interest payment) is available for financing expenditure. In fact, borrowing is financial burden on future generation to pay
loan and interest amount which retards growth of economy.
(v) Increases foreign dependence. Government also borrows from foreign countries. This increases dependence on
foreign countries which often lead to economic and political interference.
Is fiscal deficit advantageous? It depends on its use. Fiscal deficit is advantageous to a country, if it creates new capital
assets which increase productive capacity and generate future income stream. On the contrary it is deterimental for the
economy if it is used merely to cover revenue deficit.