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In India, the fiscal deficit is financed by obtaining funds from Reserve Bank of India,
called deficit financing. The fiscal deficit is also financed by obtaining funds from
the money market (primarily from banks).
In order to relate high fiscal deficit to inflation, some economists believe that the portion
of fiscal deficit, which is financed by obtaining funds from the Reserve Bank of India,
directs to rise in the money stock and a higher money stock eventually heads towards
inflation.
Expert recommendation
Financial advisors recommend that the Government should not promote disinvestment
to reduce fiscal deficits. Fiscal deficit can be reduced by bringing up revenues or by
lowering expenditure.
Impact
Fiscal deficit reduction has an impact over the agricultural sector and social sector.
Government'sinvestments in these sectors will be reduced.