Did Inflation Stoke Fiscal Deficit?

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: For a greater part of the 1990s, annual average gross fiscal deficit as a percentage of gross domestic product (GDP) has been slightly below six in India. This is considered bad for the economy. In countries within the European Union (EU), the threshold is 3 per cent. High fiscal deficit is frowned upon because it is a sign of fiscal imbalance, resources gap and growing government indebtedness.

A resources gap in particular forces interest rates to rise and ends up crowding out private sector investment. It has a growth sapping effect. There is no dearth of literature on the relationship between fiscal deficit and inflation. There is no direct causal relation between the two, however. As a matter of fact, in Fiscal Deficit And Inflation In India: A Study In Nexus, Dr Ashutosh Raravikar says that fiscal deficit is not the cause of inflation. On the contrary, it is the outcome of it.

In an economy that has vast underutilised resources, fiscal deficit can have positive spinoffs by stimulating higher output and lower unemployment. But when the economy is in a state of full employment, any increase in fiscal deficit is sure to result in inflation. In any case, Indians seem to have a fiscal deficit phobia. Curtailing the fiscal deficit has been an obsession with every finance minister, especially since the economic reforms began in 1991, partly because of International Monetary Fund (IMF)-World Bank pressure, but largely because of an uncanny association between fiscal deficit and inflation in the public mind.

This book, revised from the author’s doctoral dissertation, “is a study of the impact of the Indian government on the inflation in the country during the last 15 years of the previous century”. The author provides data upto 2002-03, wherever possible. During the 1980s, the fiscal deficits of the Indian government worsened and spilled over into the 1990s. The surplus on the capital account was converted into the revenue account to meet unproductive, wasteful expenditure of the government. Consequently, inflation became inevitable during a greater part of the 1980s and 1990s, barring fiscals 1998-2000.