18.12 ndian onom
pattern in the economy. Ultimately, comPosition of fiscAl Deficit
economy heads for a double negative
The Keynesian idea of deficit financing, though he
impact—lower investment (leading to
advocated it, had a catch in it also which was usually
lower production, lower GDPs and
missed by third world economies or intentionally
lower per capita income, etc.) and
overlooked by them. The catch is related to the
lower demands (by the general public
question as to why an economy wants to go for
as well as by the corporate world) in the
fiscal deficit. Thus, it becomes essential to go for
economy—the economy moves either an analysis of the composition20 of the fiscal deficit
for stagnation or for a slowdown (one can of a government.
see them happening in India repeatedly
Out of the two broad expenditure obligations
throughout the 1960s, 1970s, 1980s).
of a government—revenue expenditure and
The situation improved after the mid-
capital expenditure—the following combinations
1990s.
of expenditure composition are suggested:
(iv) Printing Currency is the last resort for
(i) A fiscal deficit with a surplus revenue
the government in managing its deficit.19
budget or a zero revenue expenditure
But it has the biggest handicap that with
is the best composition of fiscal deficit
it the government cannot go for the
and the most suitable time for deficit
expenditures which are to be made in the
financing.
foreign currency. Even if the government
(ii) The deficit requirements for lower
is satisfied on this front, printing fresh
revenue expenditures and higher capital
currencies does have other damaging
expenditures are the next best situation
effects on the economy:
for deficit financing, provided revenue
(a) It increases inflation proportionally.
deficit is eliminated soon.
(India regularly went for it since the
(iii) The last could be the situation when
early 1970s and usually had to bear
major part of deficit financing is to fulfil
double digit inflations.)
revenue expenditures and a minor part
(b) It brings in regular pressure and to go for capital expenditures. The total
obligation on the government money of the deficit might go to fulfil
for upward revision in wages and revenue expenditure, which could be the
salaries of government employees— worst form of it.
ultimately increasing the government
Basically, there should be a judicious mix of
expenditures necessitating further
plan and non-plan expenditure as well as revenue
printing of currency and further
and capital expenditures in India. Lesser non-plan
inflation—a vicious cycle into which
expenditure or higher plan-expenditure are better
economies entangle themselves.
reasons behind deficit financing in India (though
Now, it remains a matter of choice and India has a typical feature of capital expenditure
availability of the above-given means, and which makes this combination of deficit financing
which means a government adopts and in what not a suggested form—discussed ahead).
proportion, for fulfilling its deficit requirements.
20. J. Cullis and P. Jones, Public Finance and Public
19. L.N. Rangarajan, The Arthashastra, pp. 259–62. Choice ( New York: Oxford University Press, 1998).