External Aids is the best means to finance a government rsquo s fiscal deficit because It brings in ...........

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External Aids is the best means to finance a government’s fiscal deficit because

It brings in foreign currency that is also useful to bridge the Balance of payments (BoP) apart from its utility in developmental expenditures.
It does not cause crowding out effect in the domestic market and is favourable to the domestic borrowers.

Which of the above is/are correct?

1 only

2 only

Both 1 and 2

None

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Explanation:

Statement 1: If they are a grant or coming without interest, no better way to finance the deficit, if we ignore their inflationary effects.

Statement 2: When the domestic market has limited amount of funds, and if the government desires to borrow a large share of it to finance the fiscal deficit, it tends to raise the demand for funds in the market. This shoots the market interest rate for the funds and causes problems to the domestic investors who now have to pay a higher interest rate to avail the same loan.

If the same money is borrowed from abroad, the crowing out effect doesn’t occur.