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).