Topic: Government Budgeting.
5. What is Fiscal Deficit? What are the impacts of Fiscal Deficit on the economy? What are the ways to financing the Fiscal deficit? Suggest steps for fiscal consolidation in the light of the Union Budget proposals. (250 words)
Reference: The Hindu
Why the question:
Finance Minister Nirmala Sitharaman made a brave effort to make good use of the lessons learnt from the unprecedented global health crisis and ensuing economic setback to put lives and livelihoods back on track.
Key Demand of the question:
To write about impact of the fiscal deficits on the economy, ways to finance a deficit and the suggest steps for fiscal consolidation.
Structure of the answer:
Begin by defining Fiscal deficit.
In the first bring out the short and long term impact of Fiscal deficit. short-term boost in operations and profitability, encourage rent-seeking, stimulus spending, welfare, public good, infrastructure, war financing, and environmental protection. Negative impact like accumulate more debt, interest rates tend to go up, danger of rating agencies downgrading India’s credit rating, depreciation in the value of the rupee etc.
Next, mention ways to finance it. Deficit financing and monetisation of fiscal deficit, sale of government securities, such as Treasury bonds (T-bonds) etc.
In the light of breaching of the limits of FRBM act due to the emergency, suggest way to achieve fiscal consolidation.
Conclude with a way forward.