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                                                                                 li   inan e in ndia    18.11
     not justified and not based on sound fundamentals               impacts of the higher fiscal deficit than
     of economics. Finally, India headed for a slow                  the suggested levels (4.5 per cent).
     but confident process of fiscal reforms that is also               External Grants are even better elements
     known as the process of fiscal consolidation (to be             in this case (which comes free—neither
     discussed in the coming pages).                                 interest nor any repayments) but it either
                                                                     did not come to India (since 1975, the
     meAns of Deficit finAncing                                      year of the first Pokhran testings) or
     Once deficit financing became an established part               India did not accept it (as happened post-
     of public finance around the world, the means                   Tsunami, arguing grants/aids coming
     of going for it were also evolved by that time.                 with a tag/condition). That is why here
     These means, basically are the ways in which the                this segment has not been discussed as a
     government may utilise the amount of money                      means to manage deficit.
     created as the deficit to sustain its budget for         (ii) External Borrowings17 are the next best
     developmental or political needs. These means are               way to manage fiscal deficit with the
     given below in order of their suggested and tried               condition that the external loans are
     preferences.                                                    comparatively cheaper and long-term.
                                                                        Though external loans are considered
           (i) External Aids16 are the best money as
                                                                     an erosion in the nation’s sovereign
                 a means to fulfil a government’s deficit
                                                                     decision making process, this has its own
                 requirements even if it is coming with
                                                                     benefit and is considered better than the
                 soft interest. If they are coming without
                                                                     internal borrowings due to two reasons:
                 interest nothing could be better.
                                                                     (a) External borrowing bring in foreign
                    When India went to borrow from the                   currency/hard currency which gives
                 IMF in the wake of the financial crisis                 extra edge to the government spending
                 of 1990–91, the body advised India to                   as by this the government may fulfil
                 keep its fiscal deficit to the tune of 4.5              its developmental requirements inside
                 per cent of its GDP and noted it to be                  the country as well as from outside
                 sustainable for the economy. What was                   the country.
                 the rationale behind this data? Basically,         (b) It is prefered over the internal
                 in those times with the foreign aids (soft              borrowings due to ‘crowding out
                 loans either from the WB or from the Aid                effect’. If the government itself goes
                 India Forum) India was able to manage its               on borrowing from the banks of
                 budget to the tune of 4.5 per cent of its               the country, from where will others
                 GDP. In 2002, when India’s fiscal deficit               borrow for investment purposes?
                 was around 6 per cent (5.7 per cent to      (iii) Internal Borrowings18 come as the
                 be precise) the IMF validated it to be              third preferred route of fiscal deficit
                 sustainable, the reasons were two—first,            management. But going for it in a huge
                 India was able to show a check on fiscal            way hampers the investment prospects
                 deficit and secondly, at the same time              of the public and the corporate sector. It
                 the forex reserves of the country were              has the same impact on the expenditure
                 suitably higher to neutralise the negative
                                                            17.   Ibid.
       16.    Ibid.                                         18.   Ibid.