Implications of Fiscal deficit
1.Fiscal deficit indicates the total borrowing requirements of the government. Borrowings not only involve repayment of principal amount, but also require payment of interest.Interest payments increase the revenue expenditure, which leads to revenue deficit. It creates a vicious circle of fiscal deficit and revenue deficit, wherein government takes more loans to repay the earlier loans. As a result, country is caught in a debt trap.
2.Government mainly borrows from Reserve Bank of India (RBI) to meet its fiscal deficit. RBI prints new currency to meet the deficit requirements. It increases the money supply in the economy and creates inflationary pressure.
3.Government also borrows from rest of the world, which raises its dependence on other countries.
Implications of revenue deficit
1. It indicates the inability of the government to meet its regular and recurring expenditure in the proposed budget.
2. It implies that government is dissaving, i.e. government is using up savings of other sectors of the economy to finance its consumption expenditure
3. It also implies that the government has to make up this deficit from capital receipts, i.e. through borrowings or disinvestments. It means, revenue deficit either leads to an increase in liability in the form of borrowings or reduces the assets through disinvestment.
