Fiscal Deficit

A high fiscal deficit results in competition for funds, as borrowing by the government increases.More competition for funds means the following

• The interest rates rise
• Since the cost of funds increases , investment slows down
• Economic activity drops, leading to a depression
• Foreign inflows increase in the form of FII, resulting in appreciation of currency.Appreciation of currency is not good for exports.
• Foreign exchange volatility increses,  making the economic environment unstable
• Inflation increases hurting the poor the most.
• Since the govt borrows more than it earns, the credibility of the nation goes down.

All these are not good for the economy and that is why the FRBM act lays down the limits on fiscal deficit. A low fiscal deficit is healthy as credit is the lifeline of an economy, but too much of leverage is what is worrisome.The govt has , to my mind, now and in the past, concentrated on reducing fiscal deficit by increasing revenue, rather than by controlling expenditure.The largest govt expenditure is on account of subsidies, which in any case are misdirected. As a child , I was often told by my father, that the income can be perceived to be doubled by controlling the expenditure. As a govt servant, I know that there is a lot of scope for controlling wasteful expenditure.I urge the political leadership to take note of this, and force  the govt machinery to tighten its belt. They of course need to lead by example before doing that.