Is fiscal deficit always inflationary in nature? explain.
Fiscal deficit indicates the total borrowing requirements of the government. To finance its fiscal deficit, the government mainly borrows from the RBI to meet its fiscal deficit.
- RBI prints new currency to meet the deficit requirements of the government. This increases the money supply in the economy.
- Fiscal deficits can be inflationary as printing new notes increases money supply in the economy and thereby increase purchasing power in the economy. It can further worsen the situation if the new money is used for the current consumption expenditure of the government.
- However if the increase in money supply increases supply of goods and services or it used for developmental expenditures then fiscal deficit will not prove to be inflationary.
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