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Context: Upcoming budget and the fiscal deficit.
More in news:
Present state of Economy:
Fiscal Deficit:
Significance of fiscal deficit:
Acceptable level of fiscal deficit:
What happens if fiscal deficit shoots up?
The government has to borrow more or ask RBI to print more money. But the printing of currency has its side effects. It leads to inflation and raises interest rates. Therefore, no government wishes to finance the fiscal deficit by printing money. It prefers borrowing. From a high of 5.9% in 2011-12, fiscal deficit has been brought down to 3.5% in 2017-18. The target was to achieve 3.3% in 2018-19. During the Budget in July 2019, Finance minister Nirmala Sitharaman reduced the fiscal deficit target to 3.3% from an earlier 3.4% for 2019-20 in a move that signalled the government's commitment to fiscal consolidation.
Available option:
Way forward:
Ideally, the 3 per cent fiscal deficit limit should be implemented over an economic cycle and not every year. During the years in which there is an economic slowdown, the fiscal deficit limit should automatically be increased to 3.5 per cent of the GDP or more. In years of better economic growth, it should be brought down below 3 per cent; the problem is that this has not happened so far.
The government should keep forward the true economic and fiscal narrative in front of the nation so as to understand the real opportunities and challenges.
By: Shashank Shekhar ProfileResourcesReport error
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